Competition for Flow and Short-Termism in Activism
Review of Corporate Finance Studies, forthcoming
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 429/2014
58 Pages Posted: 5 Nov 2012 Last revised: 18 Sep 2020
There are 2 versions of this paper
Competition for Flow and Short-Termism in Activism
Why is Hedge Fund Activism Procyclical?
Date Written: September 7, 2020
Abstract
We develop a dual-layered agency model to study blockholder monitoring by activist funds that compete for investor flow. Competition for flow affects the manner in which activist funds govern as blockholders. In particular, funds inflate short-term performance by increasing payouts financed by higher (net) leverage, which subsequently discourages value-creating interventions in economic downturns due to debt overhang. Our theory suggests a new channel via which asset manager incentives may foster economic fragility and links together the observed procyclicality of activist investments with the documented effect of such funds on the leverage of their target companies.
Keywords: blockholder monitoring, activist hedge funds, competition for flow, corporate governance, delegated portfolio management
JEL Classification: G34, G23
Suggested Citation: Suggested Citation
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