Governance through Regulation, Liquidity, and Destruction: Fighting Short-Termism under Moral Hazard and Adverse Selection

75 Pages Posted: 9 Jan 2023 Last revised: 14 Apr 2023

See all articles by Adrian Aycan Corum

Adrian Aycan Corum

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: March 15, 2023

Abstract

I study a model of blockholder short-termism, where each blockholder (e.g., activist shareholder) has a stake in a different firm and can sell before the impact of his actions on firm value is realized. I find that the existence of value-destroying blockholders can increase average firm value, because it motivates the value-creating blockholders to keep their stake longer due to a lower stock price at exit, and in turn, to exert more effort. Moreover, not only policies that make blockholders' exit more difficult (e.g., tightening disclosure rules for selling, raising short-term taxes, or reducing liquidity) but also policies that reward long-termism (e.g., loyalty shares) can destroy total firm value, even if the number of value-creating blockholders stays the same. The model has implications for a wide range of blockholders (activists, CEOs, boards, entrepreneurs, VCs).

Keywords: Blockholder, Liquidity, Incentives, Myopia, Shareholder Activism, Short-Termism

JEL Classification: C70, D82, G23, G24, G32, G34, L26

Suggested Citation

Corum, Adrian Aycan, Governance through Regulation, Liquidity, and Destruction: Fighting Short-Termism under Moral Hazard and Adverse Selection (March 15, 2023). Available at SSRN: https://ssrn.com/abstract=4319599 or http://dx.doi.org/10.2139/ssrn.4319599

Adrian Aycan Corum (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

437 Sage Hall
114 East Ave.
Ithaca, NY 14853
United States

HOME PAGE: http://https://www.johnson.cornell.edu/faculty-and-research/faculty/aac256

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