The Emergence of Concentrated Ownership and the Rebalancing of Portfolios Due to Shareholder Activism in a Financial Market Equilibrium

EFMA 2002 London Meetings

41 Pages Posted: 19 Jun 2002

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

We consider a financial market equilibrium with correlated firms, risk averse investors holding diversified portfolios, and an activist investor who has the ability to perform value-enhancing activities that increase with ownership. By combining a standard financial market equilibrium with a modified corporate finance model, we show that when the activist can aect a single firm, optimizing behavior by investors results in the activist holding a concentration of shares in that firm. Furthermore, investors rebalance their portfolios, and the price of the affected security increases. Concentration arises in the presence of complete information and is a consequence of the Walrasian equilibrium that gives no special power to the activist. When the activist can affect multiple firms, rebalancing of all portfolios occurs, but the activist may lose concentration in some of the firms she might affect. Prices for all securities change. Since we assume the costs of activism are borne exclusively by the activist, and since all investors benefit from activism, there appears to be a free-rider problem. However, we show that in equilibrium, the costs and benefits of activism are shared among all market participants, mitigating this free-rider problem. With the possibility of multiple activists in multiple firms, concentration can occur for several; rebalancing occurs for all investors. Asymmetric information also results in rebalancing and ownership concentration, but not necessarily in the hands of the activist.

JEL Classification: G10

Suggested Citation

Katz, Barbara G. and Owen, Joel, The Emergence of Concentrated Ownership and the Rebalancing of Portfolios Due to Shareholder Activism in a Financial Market Equilibrium (October 2001). EFMA 2002 London Meetings, Available at SSRN: https://ssrn.com/abstract=314379 or http://dx.doi.org/10.2139/ssrn.314379

Barbara G. Katz (Contact Author)

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 )

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