This paper studies the role of activist investors in the market for corporate control. We show that activists have higher credibility than bidders when campaigning against entrenched incumbents, and hence, are more effective in relaxing their resistance to takeovers. This result holds although bidders and activists can use similar techniques to challenge the resistance of corporate boards (i.e., proxy fights) and have similar governance expertise. Since activists have a relative advantage in "putting companies into play", there is strategic complementarity between the search of activists for firms that are likely to receive a takeover bid and the search of bidders for targets with which they can create synergies and that are available for sale. The analysis sheds light on the interaction between M&A and shareholder activism and provides a framework to identify the treatment and the selection effects of shareholder activism.
This paper studies communication and intervention as mechanisms of governance. I develop a model in which a privately informed principal can overrule the decisions of the agent (intervention) if the agent disobeys the principal's instructions (communication). The main result shows that intervention can be counterproductive, as it undermines the principal's ability to resolve the conflict with the agent through communication. I show that the possibility of intervention creates additional tension between the principal and the agent by providing the agent with opportunities to challenge the principal to "back her words with actions". This result provides a novel argument as to why a commitment not to intervene can be beneficial to the principal, echoing the common wisdom that the capacity to make unilateral decisions can discourage effective deliberation, cooperation and compliance. The analysis sheds new light on the effectiveness of different governance arrangements and provides novel predictions about expected patterns of intervention.
We study the effect of an investor owning multiple firms on governance through both voice and exit, and by both equityholders and debtholders. Under common ownership, an informed investor has flexibility over which assets to retain and which to sell, and sells the worst assets first. This increases adverse selection and thus price informativeness. In an exit model, the manager's incentives to work are stronger since the price impact of investor selling is greater. In a voice model, the investor's incentives to monitor are stronger since "cutting-and-running" is less profitable. Our results contrast conventional wisdom that common ownership always weakens governance by spreading an investor too thinly.
This paper examines how the labor market for directors and directors' reputational concerns affect corporate governance. We develop a model in which directors can influence corporate governance of their firms, and corporate governance, among other things, affects firms' demand for new directors. Whether the labor market rewards directors for having a reputation of being shareholder-friendly or management-friendly is endogenous and depends on the aggregate level of corporate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance decisions across firms. Directors' reputational concerns amplify the corporate governance system in the sense that strong systems become stronger and weak systems become weaker. We derive implications for director appointments, multiple directorships, transparency of the corporate governance system, and board size.
This paper studies informal communications and exit as alternative ways through which investors can influence managers when obtaining control is not feasible or too costly. The first result shows that exit relaxes the tension between investors and managers, and thereby enhances the effectiveness of communications as a form of shareholder activism. The second result shows that public communications are more effective than private communications if and only if managers are concerned about the stock price and their decisions are observed by the market. Overall, the analysis relates the effectiveness of communications to market liquidity; entrenchment and compensation structure of managers; and investors' expertise, investment horizon and ownership size.
Shareholder proposals are a common form of shareholder activism. Voting for shareholder proposals, however, is non-binding in the sense that the management has the authority to reject the proposal even if it received majority support from shareholders. We analyze whether non-binding voting is an effective mechanism for conveying shareholder expectations. We show that in contrast to binding voting, non-binding voting generally fails to convey shareholder views when the interests of the manager and shareholders are not aligned. Surprisingly, the presence of an activist investor who can discipline the manager may enhance the advisory role of non-binding voting only if there is substantial conflict of interest between shareholders and the activist.
This paper studies the optimal structure of the board with an emphasis on the expertise of directors. The analysis provides three main results. First, the expertise of a value-maximizing board can harm shareholder value. Second, it is optimal to design a board whose members are biased against the manager, especially when their expertise is high. Third, directors' desire to demonstrate expertise can shift power from the board to the manager on the expense of shareholders. In this sense, the "friendliness" of the board is endogenous. The effect of these reputation concerns is amplified when the communication within the boardroom is transparent.
This paper studies the advisory role of the board in takeovers. Corporate boards can alert target shareholders when a takeover offer is inadequate and assist them to coordinate their collective decision. The analysis relates the characteristics of the bidder and the target firm to the influence the board has on target shareholders and the value of their shares, and shows that they can both increase with the board's bias. Importantly, the board can be influential even if in equilibrium its recommendation is uninformative and ignored by shareholders. The analysis also provides a novel rationale against the use of takeover defenses.