IDEAS home Printed from https://ideas.repec.org/a/kap/jmgtgv/v11y2007i1p23-43.html

Socially and privately optimal shareholder activism

Author

Listed:
  • 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

Suggested Citation

  • Pascal Frantz & Norvald Instefjord, 2007. "Socially and privately optimal shareholder activism," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 11(1), pages 23-43, March.
    • Handle: RePEc:kap:jmgtgv:v:11:y:2007:i:1:p:23-43
    DOI: 10.1007/s10997-007-9013-x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10997-007-9013-x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10997-007-9013-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Simon Johnson, 2000. "Tunneling," American Economic Review, American Economic Association, vol. 90(2), pages 22-27, May.
    2. Laffont, Jean-Jacques, 1995. "Regulation, moral hazard and insurance of environmental risks," Journal of Public Economics, Elsevier, vol. 58(3), pages 319-336, November.
    3. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    4. Denis, David J & Denis, Diane K & Sarin, Atulya, 1997. "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, American Finance Association, vol. 52(1), pages 135-160, March.
    5. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    6. Brian K. Boyd, 1994. "Board control and ceo compensation," Strategic Management Journal, Wiley Blackwell, vol. 15(5), pages 335-344, June.
    7. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-1199, December.
    8. Hallock, Kevin F., 1997. "Reciprocally Interlocking Boards of Directors and Executive Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(3), pages 331-344, September.
    9. 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.
    10. Boot, Arnoud W A & Thakor, Anjan V, 2001. "The Many Faces of Information Disclosure," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1021-1057.
    11. Thomas H. Noe, 2002. "Investor Activism and Financial Market Structure," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 289-318, March.
    12. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    13. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 901-932.
    14. Franklin Allen & Douglas Gale, 2001. "Comparing Financial Systems," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511258, December.
    15. Sydney Finkelstein & Donald C. Hambrick, 1989. "Chief executive compensation: A study of the intersection of markets and political processes," Strategic Management Journal, Wiley Blackwell, vol. 10(2), pages 121-134, March.
    16. 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 225-264, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    2. Liang, Hao & Renneboog, Luc & Sun, Sunny Li, 2015. "The political determinants of executive compensation: Evidence from an emerging economy," Emerging Markets Review, Elsevier, vol. 25(C), pages 69-91.
    3. Sonja Fagernäs, 2006. "How do family ties, boards and regulation affect pay at the top? Evidence for Indian CEOs," Working Papers wp335, Centre for Business Research, University of Cambridge.
    4. Jared Harris, 2009. "What’s Wrong with Executive Compensation?," Journal of Business Ethics, Springer, vol. 85(1), pages 147-156, February.
    5. Kuang, Yu Flora & Qin, Bo, 2009. "Performance-vested stock options and interest alignment," The British Accounting Review, Elsevier, vol. 41(1), pages 46-61.
    6. Goergen, Marc & Manjon, Miguel C. & Renneboog, Luc, 2008. "Recent developments in German corporate governance," International Review of Law and Economics, Elsevier, vol. 28(3), pages 175-193, September.
    7. Chen, Chao-Jung & Hsu, Chung-Yuan & Chen, Yu-Lin, 2014. "The impact of family control on the top management compensation mix and incentive orientation," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 29-46.
    8. Otten, Jordan J.A. & Heugens, Pursey P.M.A.R, 2007. "Extending the managerial power theory of executive pay: A cross national test," MPRA Paper 6778, University Library of Munich, Germany.
    9. Stefan Winter & Philip Michels, 2019. "The managerial power approach: Is it testable?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 23(3), pages 637-668, September.
    10. Andres, Christian & Fernau, Erik & Theissen, Erik, 2014. "Should I stay or should I go? Former CEOs as monitors," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 26-47.
    11. Justin Law & Wayne Yu, 2018. "Corporate spinoffs and executive compensation," Frontiers of Business Research in China, Springer, vol. 12(1), pages 1-25, December.
    12. Li, Donghui & Moshirian, Fariborz & Nguyen, Pascal & Tan, Liwen, 2007. "Corporate governance or globalization: What determines CEO compensation in China?," Research in International Business and Finance, Elsevier, vol. 21(1), pages 32-49, January.
    13. Brick, Ivan E. & Palmon, Oded & Wald, John K., 2006. "CEO compensation, director compensation, and firm performance: Evidence of cronyism?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 403-423, June.
    14. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    15. Benson, Bradley W. & Chen, Yu & James, Hui L. & Park, Jung Chul, 2020. "So far away from me: Firm location and the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    16. Novak, Jiri & Bilinski, Pawel, 2018. "Social stigma and executive compensation," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 169-184.
    17. Albuquerque, Ana, 2009. "Peer firms in relative performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 69-89, October.
    18. Chii-Shyan Kuo & Jow-Ran Chang & Shih-Ti Yu, 2013. "Effect of mandatory pro forma earnings disclosure on the relation between CEO share bonuses and firm performance," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 189-215, February.
    19. Renneboog, Luc & Zhao, Yang, 2011. "Us knows us in the UK: On director networks and CEO compensation," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1132-1157, September.
    20. Kang, Qiang & Liu, Qiao, 2008. "Stock trading, information production, and executive incentives," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 484-498, September.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jmgtgv:v:11:y:2007:i:1:p:23-43. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.