Activism's Impact on Diversified Investors and the Market

45 Pages Posted: 26 Jan 2013

See all articles by Barbara G. Katz

Barbara G. Katz

Leonard N. Stern School of Business - Department of Economics

Joel Owen

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: January 2013

Abstract

We model activism as it affects the future distribution of prices in a portfolio context with risk-averse expected utility of end-of-period wealth maximizing investors. We characterize activism as affecting the mean, the variance, and/or the covariance of the target firm’s price with the prices of the other firms. This characterization allows us to investigate conditions under which the activist would choose to become an activist and, subsequently, to derive the sequence of equilibria that begins with the surreptitious acquisition of shares by the activist and ends at the moment of the activist’s divestiture of these shares. We investigate the impact of activism not only on the target firm’s price over time and the activist’s profit, but also on the redistribution of portfolio holdings of all market participants that this activism induces. We propose a method to evaluate activism and show that, while activism may augment the share price of the target firm, there exist conditions under which activism would not necessarily increase the value of the market. Furthermore, we show that the pro.t of the activist is at the expense of the group of other investors. We compare our results to recent empirical findings.

Keywords: Shareholder activism, activism, hedge funds, corporate governance, diversi ed portfolios

Suggested Citation

Katz, Barbara G. and Owen, Joel, Activism's Impact on Diversified Investors and the Market (January 2013). NYU Working Paper No. 2451/31697. Available at SSRN: https://ssrn.com/abstract=2207281

Barbara G. Katz

Leonard N. Stern School of Business - Department of Economics ( email )

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Joel Owen

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West 4th Street
Room 8-160
New York, NY 10012-0258
United States
212-998-0446 (Phone)
212-995-4003 (Fax)

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