Who are the activists? Investor characteristics and corporate improvements

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School of Economics | Master's thesis
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PURPOSE OF THE STUDY The conflicts of interest between owners and managers have spurred a great deal of research on shareholders’ potential ability to reduce agency costs in public corporations. Scholars, however, still disagree on which investors defy the free-rider problem and engage in valueadding activism. We develop a novel approach to identify activist investors based on their past investment behaviour and study where such owners improve their target companies. We depart from the existing literature and produce two alternative investor groupings based on portfolio concentration and investment horizon to predict propensity to activism. We examine how the investor groups relate to improvements in corporate governance, organisation and payout. DATA We study the effect of different investor types on large U.S. and European publicly traded firms, as included in the S&P 1500 Composite and the STOXX Europe TMI indices, during the years 2003 to 2009. The foundation of our study lays on an extensive panel database comprising three unique hand-collected data sets, one for our investor universe (FactSet LionShares Global Ownership), one for corporate governance (RiskMetrics Corporate Governance Quotient) and one for organisational improvements (SDC Platinum). Further, we deploy standard financial databases to source dividend payout and control variables. RESULTS Investors with high portfolio concentration and long investment horizon are consistently associated with corporate governance and organisational improvements but not with increases in dividend payout. Specifically, concentrated long-term investors relate to improvements in overall governance and board arrangements as well as corporate diversification reductions. Equally importantly, we find that investors with very high portfolio concentration and very long investment horizon exhibit no association with the same improvements, and propose a private benefit explanation. Our findings contribute to the present-day perception of who activist investors are and how they improve the companies they invest in. In contrast with current research on activism, we show that no externally labelled investor group captures the investors that are actively improving governance or organisation in their target companies. Further, we provide support for the perception that investor activism relies primarily on individual investors with the right characteristics rather than the firms’ overall ownership structures.
investor activism, agency costs, incentives to monitor, corporate improvements
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