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Socially and privately optimal shareholder activism

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Author Info
Pascal Frantz ()
Norvald Instefjord ()
Abstract

This paper aims to evaluate the private and social gains of shareholder activism in an optimal contracting framework involving dispersed shareholders who may become active. The social gains are based on the welfare to stake holders in the firm, whereas the private gains are based on shareholder wealth only. Active shareholders influence the contracting game with the CEO, and therefore also the size and the distribution of the surplus to be split between the shareholders and the CEO. Although the model is very simple and focussing on the creation and distribution of welfare between the shareholders and the CEO, we nonetheless identify surprising divergence between the private and social profitability of shareholder activism. Shareholder activism that is privately profitable is not necessarily socially profitable. The distributional effects of shareholder activism may dominate the efficiency effects to make shareholder activism a negative social NPV project. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s10997-007-9013-x
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Publisher Info
Article provided by Springer in its journal Journal of Management & Governance.

Volume (Year): 11 (2007)
Issue (Month): 1 (March)
Pages: 23-43
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:kap:jmgtgv:v:11:y:2007:i:1:p:23-43

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Web page: http://www.springerlink.com/link.asp?id=102940

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Related research
Keywords: Corporate governance; Dismissal; Executive pay; Shareholder activism; G32; J33; J41;

References listed on IDEAS
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  1. Boot, Arnoud W A & Thakor, Anjan V, 2001. "The Many Faces of Information Disclosure," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(4), pages 1021-57.
    Other versions:
  2. Thomas H. Noe, 2002. "Investor Activism and Financial Market Structure," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(1), pages 289-318, March.
    Other versions:
  3. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-99, December. [Downloadable!] (restricted)
  4. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April. [Downloadable!] (restricted)
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  5. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  6. Hallock, Kevin F., 1997. "Reciprocally Interlocking Boards of Directors and Executive Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 331-344, September. [Downloadable!]
  7. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier. [Downloadable!] (restricted)
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