Optimal Corporate Governance in the Presence of an Activist Investor

Cohn, Jonathan B.; Rajan, Uday

doi:10.1093/rfs/hht001

Cited by 42 publications

(21 citation statements)

References 41 publications

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“…If > 0, this information may change the calculation behind the board's decision to accommodate the investor's demand. 18 To explore this possibility, I assume that the board is perfectly informed about e (the market maker and shareholders remain uninformed) while the investor has an alternative source of private information, as described below.…”

Section: Informed Board and Alternative Sources Of Private Informationmentioning

confidence: 99%

Soft Shareholder Activism

Levit¹

2018

The Review of Financial Studies

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This paper studies communications between investors and firms as a form of corporate governance. The main premise is that activist investors cannot force their ideas on companies; they must persuade the board or other shareholders that implementing these ideas is in the best interest of the firm. In this framework, I show that voice (launching a public campaign) and exit (selling shares) enhance the ability of activists to govern through communication. The analysis identifies the factors that contribute to successful dialogues between investors and firms. It also shows that public communications are likely to be ineffective, justifying the prevalence of behind-the-scenes communications.

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Section: Informed Board and Alternative Sources Of Private Informationmentioning

confidence: 99%

Soft Shareholder Activism

Levit¹

2018

The Review of Financial Studies

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“…More recently, Edmans and Manso (2011) argue that a multiple blockholder structure exacerbates the free-rider problem and reduces the e¤ectiveness of direct intervention ("voice") but increases the usefulness of governance through trading ("exit"). Cohn and Rajan (2011) consider the interplay between internal and external governance in a model, in which the activist incurs a …xed cost as a function of his information about the …rm.…”

Section: Literature Reviewmentioning

confidence: 99%

The costs of shareholder activism: Evidence from a sequential decision model

Gantchev

2013

Journal of Financial Economics

256

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Recent work on hedge fund activism documents substantial abnormal returns but fails to answer the question whether these returns cover the large costs of activist campaigns. This paper provides benchmarks for monitoring costs and evaluates the net returns to activism. I model activism as a sequential decision process consisting of demand negotiations, board representation and proxy contest and estimate the costs of each distinct stage. A campaign ending in a proxy fight has average costs of $10.71 million. The proxy contest is the most expensive stage, followed by demand negotiations. The estimated monitoring costs consume more than two-thirds of gross activist returns implying that the net returns to activism are significantly lower than previously thought. Even though the mean net return is close to zero, the top quartile of activists earn higher returns on their activist holdings than on their non-activist investments. Degree Type I am grateful to Franklin Allen, Itay Goldstein, and Lucian Taylor for their invaluable guidance. I thank an anonymous referee, Ashwini Agrawal and David Denis for helpful comments and discussion. I also thank Carlos Bellon,

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“…what they do at meetings), but does not state how often they should meet and how diverse they should be. 2 Even though board meetings are fundamental for directors to obtain information, participate in decision making, avoid personal liability, and perform their monitoring and advisory roles (Adams and Ferriera, 2012), previous studies use board meetings frequency mainly to proxy for strategic control (Vafeas, 1999), board workload (Linck et al, 2008) or board vigilance in the presence of activist shareholders (Cohn and Rajan, 2013). 3 For board diversity, the focus was more on gender; it is only recently that the impact of foreign directors is considered (Masulis et al, 2012).…”

Section: Introductionmentioning

confidence: 99%

Impact of foreign directors on board meeting frequency

Hahn

Lasfer

2016

International Review of Financial Analysis

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We find that UK firms are increasingly having fewer board meetings mainly because of the significant increase in the proportion of foreign non-executive directors on the board. The combination of low meetings frequency and the presence of foreign non-executive directors is correlated with lower total shareholder returns and increases the agency conflicts through excess compensations of the CEO and chairman, which are not related to firm value creation. Our results suggest that a trade-off between increased board diversity coupled with reduced monitoring through fewer meetings, weakens the internal governance mechanism, reduces the advisory role benefits of foreign non-executive directors who are likely to possess international expertise, and exacerbates significantly the agency conflicts.

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Optimal Corporate Governance in the Presence of an Activist Investor

Cited by 42 publications

References 41 publications

Soft Shareholder Activism

Soft Shareholder Activism

The costs of shareholder activism: Evidence from a sequential decision model

Impact of foreign directors on board meeting frequency

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