Competition for Flow and Short-Termism in Activism

Mike C. Burkart · Amil Dasgupta

12 citations0/0 files storedThe Review of Corporate Finance Studies

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Corporate Finance and Governance Financial Markets and Investment Strategies Private Equity and Venture Capital

Abstract

Abstract We develop a dual-layered agency model to study blockholder monitoring by activist funds competing for investor flow. Competition for flow affects the manner in which activist funds govern as blockholders. In particular, funds inflate their short-term performance by increasing payouts that are financed by higher (net) leverage. Doing so subsequently discourages value-creating interventions during economic downturns because of 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. (JEL G34, G23) Received July 2, 2020; editorial decision August 8, 2020; Editor Uday Rajan.

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References

1997A Survey of Corporate Governance 1977Determinants of corporate borrowing 1986Large Shareholders and Corporate Control 1977The Determination of Financial Structure: The Incentive-Signalling Approach 1985Dividend Policy under Asymmetric Information 1979Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy 2008Hedge Fund Activism, Corporate Governance, and Firm Performance 2001Monetary Policy Rules Based on Real-Time Data

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