The Economics of Decoupling

Financial innovation has created a multitude of techniques for activist investors to acquire voting rights in excess of their economic exposure. We provide structure to the manifold of decoupling techniques by classifying them into Buy&Hedge, Hedge&Buy, and Vote Trading techniques. The possibility to cast votes without bearing the effect on share value is of particular interest to an activist who wants to push her private agenda, instead of maximizing firm value. Thus, we analyze which classes of decoupling techniques can be exploited profitably by a hostile activist. We find that Vote Trading techniques are most profitable and have the largest potential to reduce overall and shareholder welfare. Buy&Hedge techniques are constrained efficient because the activist suffers from a commitment problem. Hedge&Buy techniques fall in between, exhibiting inefficient and constrained-efficient equilibria. The results match the empirical evidence on vote prices from options and equity lending markets.