The unintended consequences of divestment

Shaun William Davies and Edward Dickersin Van Wesep

Journal of Financial Economics, 2018, vol. 128, issue 3, 558-575

Abstract: A divestment campaign aims to depress share prices to induce managers to change firm behavior. Assuming that managers make profit-maximizing decisions in the absence of a campaign, firms that accede to divestors’ demands raise short-run share prices but depress long-run profits. Managers who are more interested in short-run prices are therefore more motivated by divestment than managers who care about long-run profits. We show that, as most managerial compensation contracts reward long-run profitability and stock returns, divestment can be ineffective at best, and perhaps counterproductive, rewarding managers who attract divestment campaigns. In a quantification exercise, we show that the wealth of most executives running likely divestment targets in 2015 would be unaffected by even large movements in share prices. Of those affected, a substantial majority would benefit from divestment.

Keywords: Divestment; Exclusionary investment; Socially responsible investment; Executive compensation (search for similar items in EconPapers)
JEL-codes: G10 G11 G30 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:128:y:2018:i:3:p:558-575

DOI: 10.1016/j.jfineco.2018.03.007

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