Journal
MANAGEMENT SCIENCE
Volume 68, Issue 8, Pages 5557-5568Publisher
INFORMS
DOI: 10.1287/mnsc.2021.4131
Keywords
shareholder activism; institutional investors; competition for flow; activist hedge funds
Funding
- Paul Woolley Center at London School of Economics and the Economic and Social Research Council [ES/S016686/1]
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The paper discusses the concept of wolf pack activism, in which multiple delegated blockholders engage target management in parallel. This mechanism increases engagement incentives, helps alleviate the problem of insufficient engagement, although it may also lead to excessive engagement.
Blockholder monitoring is central to corporate governance, but blockholders large enough to exercise significant unilateral influence are rare. Mechanisms that enable moderately sized blockholders to exert collective influence are therefore important. Existing theory suggests that engagement by moderately sized blockholders is unlikely, especially when the blocks are held by delegated asset managers who have limited skin in the game. We present a model in whichmultiple delegated blockholders engage targetmanagement in parallel, that is, wolf pack activism. Delegation reduces skin in the game, which decreases incentives for engagement. However, it also induces competition over investor capital (i.e., competition for flow). We show that this increases engagement incentives and helps ameliorate the problem of insufficient engagement, although it can also foster excess engagement. Under competition for flow, the total amount of capital seeking skilled activistmanagers is relevant to engagement incentives, which helps to predict when and where wolf packs arise. Flow incentives are particularly valuable in incentivizing engagement by packswith smallermembers.
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