Activism and Takeovers
61 Pages Posted: 28 Mar 2015 Last revised: 19 Mar 2019
Date Written: March 3, 2019
Buying and campaigning for control encounter different forms of free-riding behavior in widely held firms. We derive implications of this difference in a model with effort provision: First, changes in the marginal return to effort move bidder profits and activist profits in opposite directions, so activism can outperform tender offers despite being less efficient. Second, activists are more effective brokering takeovers than restructuring firms themselves. Third, such takeover activists earn excess returns in part since their hurdle rate is the foregone return from free-riding in tender offers. These predictions match evidence on takeover activism and activist hedge funds’ performance.
Keywords: Free-rider problem, hedge fund activism, takeover activism, tender offers, market for corporate control, blockholders, M&A
JEL Classification: G34, G23
Suggested Citation: Suggested Citation