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
Date Written: October 2001
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: Suggested Citation