Cost of shareholder engagement by institutional investors under short-swing profit rule

Dongyeol Lee and Woo Chang Kim

Finance Research Letters, 2021, vol. 40, issue C

Abstract: Short-swing profit rule mandates insiders to disgorge short-term profits, thus preventing them from making short-swing trades. It can be imposed on investors who otherwise do not qualify as insiders, if they exercise certain shareholder engagements. This study provides a closed-form solution for the expected value of opportunity cost at the portfolio level incurred from such shareholder engagement activities. It can be decomposed into three parts: losing active alpha, not investing in the stock for newly invested money, and portfolio inefficiency. While discussions are based on case of National Pension Service of Korea, results can be universally applied.

Keywords: Short-swing profit rule; Institutional investor; Opportunity cost; Participating in management decision; Shareholder engagement; Stewardship code (search for similar items in EconPapers)
JEL-codes: G11 G18 G23 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320304578

DOI: 10.1016/j.frl.2020.101700

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