Working Paper: CEPR ID: DP12616
Authors: Mike Burkart; Samuel Lee
Abstract: At the core of agency problems in widely held firms is a dual coordination failure: Dispersed shareholders neither share in the cost of governance interventions (ex post free riding) nor sell shares unless the price at least matches the expected value improvement (ex ante free riding). Whether to confront the free-rider problem in its ex post or ex ante variant amounts to the choice between activism and takeovers. For small toeholds, the returns to these governance mechanisms have inverse comparative statics, and though less efficient, activism is more profitable when the potential value improvement is large. Activists are most effective when, instead of restructuring firms themselves, they broker takeovers. Such takeover activism is Pareto-improving and should earn superior returns, in part because it must pay more than what could be earned by free-riding on a tender offer instead.
Keywords: freerider problem; hedge fund activism; takeover activism; tender offers; market for corporate control; blockholders
JEL Codes: G34; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Activism (D72) | firm value improvement (G32) |
| Takeovers (G34) | improved governance outcomes (G38) |
| Takeover activism (G34) | enhanced returns (G11) |
| Structure of ownership (G32) | effectiveness of governance mechanisms (G38) |
| scope for value improvement (L25) | Activism effectiveness (D72) |
| Tradeoff between ex ante and ex post freeriding (H40) | preference for activism or takeovers (G34) |