Investor Activism and Financial Market Structure

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.