Action-Based Contracts between Firms and Shareholders
Posted: 3 Oct 2017 Last revised: 2 May 2019
Date Written: April 29, 2019
Theory has long predicted the existence of contracts between firms and sophisticated shareholders that specify explicit constraints on managers' actions (action-based contracts). This study is one of the first to show that these contracts are empirically pervasive as well. Using a comprehensive sample of about 26,000 block investments from 1996 to 2018, I find that action-based contracts are increasingly prevalent and can specify covenants that directly constrain such actions as financing, trading, directorships, dividends, joint ventures, corporate investment, financial reporting, and selective disclosure. I also find that the contract covenants are commonly stated in terms of accounting numbers, and that the prevalence of these contracts is significantly associated with measures of increased manager-shareholder agency conflicts.
Keywords: Agency Theory; Corporate Governance; Shareholder Contracts
JEL Classification: D21, G30, G32, G34, K22, L22
Suggested Citation: Suggested Citation