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Competition for flow and and short-termism in activism

Author

Listed:
  • Dasgupta, Amil
  • Burkart, Mike

Abstract

We develop a dual-layered agency model to study blockholder monitoring by activist funds that compete for investor flow. Competition for flow affects the manner in which activist funds govern as blockholders. In particular, funds inflate short-term performance by increasing payouts financed by higher (net) leverage, which subsequently discourages value-creating interventions in economic downturns due to debt overhang. Our theory suggests a new channel via which asset manager incentives may foster economic fragility and links together the observed procyclicality of activist investments with the documented effect of such funds on the leverage of their target companies.

Suggested Citation

  • Dasgupta, Amil & Burkart, Mike, 2020. "Competition for flow and and short-termism in activism," LSE Research Online Documents on Economics 106516, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:106516
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    blockholder monitoring; activist hedge funds; competition for flow; corporate governance; delegated portfolio management;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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