No.632 Value-Destroying Activism

本期主题

Value-Destroying Activism

I develop a dynamic agency model to study how activism affects firms’ governance. I show that while activism enhances shareholder value ex-post, it destroys value exante by undermining shareholders’ ability to commit to governance policies. Existing shareholders respond to the threat of activism by replacing performance pay with monitoring after poor performance and relying less on deferred compensation. When the threat of activism is low, a rise in activism levels results in increased ex-post interventions and CEO turnover, while a high threat of activism leads to such stringent monitoring that interventions become unnecessary and the need for CEO turnover is redundant. The non-monotonic relationship between exante and ex-post intervention frequencies suggests that the maximal level of deferred compensation, rather than observed interventions, is the appropriate empirical proxy for measuring the threat of activism