Managerial and Shareholder Activism Open Access
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Agency costs, as a result of separation of ownership and control, have received vast attention in the literature. One important aspect of this separation is that shareholders do not have direct control over the decisions of managers. Dissatisfied groups may exert ‘voice’ to influence the decisions of the others within a company. In my dissertation, I analyze different aspects of `voice’ with respect to agency problems within firms. Chapter 1 “Managerial Activism” examines the effect of, managerial activism in the corporate sector by identifying a unique organization, Business Roundtable (BRT), that consists of high profile CEOs within the U.S. that conducts activism through collective action. I find that managers that are involved in activism through BRT are more powerful and are paid more, but these firms also have more independent directors on their boards. In addition, firms with activist managers are less likely to face proxy fights or hostile shareholder activism. Analyzing stock price reactions and credit default swap spreads, I find that shareholder activism campaigns increase firm value in firms with activist managers only if these campaigns are not hostile. Using a natural experiment on managerial activism, I find that shareholders consider events that give more power to managers as value decreasing. On the other hand, the operating performance of firms with activist managers is similar to their peers. Chapter 2 “Institutional Investment Horizon and Hedge Fund Activism” contributes to the debate of shareholder ‘voice’ by hedge fund activists by identifying investment horizon of other institutional investors as an important factor. I find that hedge fund activism is higher in firms that long-term institutional investors invest. Furthermore, hedge fund campaigns and success rates differ with investment horizon of institutions. Firms with investors that have long-term investment horizons are more likely to receive demands on corporate governance improvements. These firms also experience significant improvement in firm performance post shareholder activism. Hedge funds with shorter-term institutional investors, on the other hand, are more likely to be delisted or experience spinoffs. Also, there is no significant performance improvement in these firms post activism. Overall, the results suggest that investment horizon of institutional owners is an important factor in explaining strategies explored in hedge fund activism as well as their effects on firm value. The findings support the notion of collaborative monitoring role of long-term institutional investors and hedge fund activists. Taken as a whole, the first essay demonstrates that managerial activism plays an important role in balancing out shareholder pressures that arise from shareholder activism. Even though activist managers are more powerful and paid more, they also balance out hostile shareholder pressures and do not destroy firm value. The second essay shows a key channel - investment horizon, which has significant impact on how hedge funds target and conduct business with corporations. The findings suggest hedge fund activism differs by the investment horizon of firms’ institutional investors. Overall, both managerial activism and investment horizon of major investors are crucial factors in understanding the dynamics among important players in corporate finance.