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Competition for Flow and Short-Termism in Activism

Author

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  • Mike Burkart
  • Amil Dasgupta

Abstract

We develop a dual-layered agency model to study blockholder monitoring by activist funds competing for investor flow. Competition for flow affects the manner in which activist funds govern as blockholders. In particular, funds inflate their short-term performance by increasing payouts that are financed by higher (net) leverage. Doing so subsequently discourages value-creating interventions during economic downturns because of 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. (JEL G34, G23)Received July 2, 2020; editorial decision August 8, 2020; Editor Uday Rajan.

Suggested Citation

  • Mike Burkart & Amil Dasgupta, 2021. "Competition for Flow and Short-Termism in Activism," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(1), pages 44-81.
    • Handle: RePEc:oup:rcorpf:v:10:y:2021:i:1:p:44-81.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfaa023
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    Cited by:

    1. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    2. Corum, Adrian Aycan & Malenko, Andrey & Malenko, Nadya, 2020. "Corporate Governance in the Presence of Active and Passive Delegated Investment," OSF Preprints 8n6xj, Center for Open Science.

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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