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Investor Activism and Financial Market Structure

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Author Info

  • Thomas H. Noe

    ()
    (A. B. Freeman School of Business, Tulane University, New Orleans)

Abstract

This article investigates investor activism when a number of investors are capable of expending resources to exercise a role in corporate governance. Strategic investors make monitoring decisions and trade in anonymous ?nancial markets with other agents whose trades are motivated by liquidity considerations. In this setting,a core group of monitoring investors emerges endogenously to curtail managerial opportunism. These core activist investors pursue activist policies and engage in heavy trading on both the buy and the sell sides of the market. In addition,a fringe group of monitoring investors, who are somewhat active and trade only on the buy side,ma y emerge. Although the smallest investors are passive,there is no monotonic relationship between shareholdings and activism. In fact,among those investors who choose to monitor with positive probability, those with smaller holdings are the most active. In addition to characterizing the emergence of monitoring activity in the presence of numerous potential activist investors,we also develop some comparative statics. Some of these comparative statics are counterintuitive from the perspective of models that fail to endogenize both security market structure and investor activism. For example,it is shown that increasing the size of the shareholdings controlled by informed,strategic investors may reduce bid-ask spreads.

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Bibliographic Info

Paper provided by Center for Research on Pensions and Welfare Policies, Turin (Italy) in its series CeRP Working Papers with number 14.

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Length: 48 pages
Date of creation: Nov 2001
Date of revision:
Handle: RePEc:crp:wpaper:14

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Keywords: Corporate governance;

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Cited by:
  1. Michel, Allen & Oded, Jacob & Shaked, Israel, 2014. "Ownership structure and performance: Evidence from the public float in IPOs," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 54-61.
  2. Francesca Cornelli & David D. Li, 2002. "Risk Arbitrage in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 837-868.
  3. Admati, Anat R. & Pfleiderer, Paul C., 2007. "The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice," Research Papers 1918r2, Stanford University, Graduate School of Business.
  4. Luc Laeven & Ross Levine, 2008. "Complex Ownership Structures and Corporate Valuations," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 579-604, April.
  5. Gaspar, Jose-Miguel & Massa, Massimo, 2007. "Local ownership as private information: Evidence on the monitoring-liquidity trade-off," Journal of Financial Economics, Elsevier, vol. 83(3), pages 751-792, March.
  6. Burns, Natasha & Kedia, Simi & Lipson, Marc, 2010. "Institutional ownership and monitoring: Evidence from financial misreporting," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 443-455, September.
  7. Kandel, Eugene & Massa, Massimo & Simonov, Andrei, 2011. "Do small shareholders count?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 641-665, September.
  8. Jacob Oded & Yu Wang, 2010. "On the different styles of large shareholders’ activism," Economics of Governance, Springer, vol. 11(3), pages 229-267, June.
  9. Lily Qiu, 2005. "Managerial Reputation Concerns, Outside Monitoring, and Investment Efficiency," Working Papers 2005-08, Brown University, Department of Economics.
  10. Elyasiani, Elyas & Jia, Jingyi Jane, 2008. "Institutional ownership stability and BHC performance," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1767-1781, September.
  11. Oded, Jacob, 2009. "Optimal execution of open-market stock repurchase programs," Journal of Financial Markets, Elsevier, vol. 12(4), pages 832-869, November.
  12. Szilagyi, P.G., 2007. "Corporate Governance and the Agency Costs of Debt and Outside Equity," Open Access publications from Tilburg University urn:nbn:nl:ui:12-321510, Tilburg University.
  13. Pascal Frantz & Norvald Instefjord, 2007. "Socially and privately optimal shareholder activism," Journal of Management and Governance, Springer, vol. 11(1), pages 23-43, March.
  14. Danny Yeung, 2012. "The Impact of Institutional Ownership: A Study of the Australian Equity Market," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 11.

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