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Relational Investing and Agency Theory

Ian Ayres () and Peter Cramton ()

Papers of Peter Cramton from University of Maryland, Department of Economics - Peter Cramton

Abstract: This Article analyzes how, and when, corporate governance could be improved by utilizing "relational investing." The term relational investing is just coming into vogue and there does not yet seem to be a consensus on what it means. Although the term has been trumpeted on the cover of Business Week, before the Conference on Relational Investing at Columbia University, relatively little legal writing had been published on the subject. For the purposes of this Article, we define relational investing to encompass commitments to buy and hold significant blocks of a corporation's stock. And it is particularly important that the relational investors commit not to tender their shares to hostile bidders. Using our definition, relational investing is used to foreclose or reduce hostile takeover threats, replacing this form of external discipline with enhanced internal discipline by the relational investors. The long-term investment induces the relational shareholders to invest more in acquiring information about the effectiveness of management. To be effective internal monitors, however, relational investors must be able to use this information to influence corporate policy. At a minimum, relational investors must be "provocable" -- they must be able to increase the likelihood that poor management or poor policies will be changed. Relational investors might accomplish these changes through either internal (informal negotiation or proxy contest) or external (tender offer) means.

Keywords: Relational Investing; Takeovers; Agency Costs; Moral Hazard (search for similar items in EconPapers)
JEL-codes: D82 G34 (search for similar items in EconPapers)
Pages: 34 pages
Date: 1994, Revised 1998-06-09
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Published in Cardozo Law Review, 15:4, January 1994, pages 1033-1066.

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