Competition for flow and and short-termism in activism

Amil Dasgupta and Mike Burkart

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: blockholder monitoring; activist hedge funds; competition for flow; corporate governance; delegated portfolio management (search for similar items in EconPapers)
JEL-codes: G23 G34 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2020-12-11
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Published in Review of Corporate Finance Studies, 11, December, 2020, 10(1), pp. 44-81. ISSN: 2046-9128

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