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Activist Investor Essay

795 words - 4 pages

Much has been written concerning shareholder activism and corporate governance during the past years; both alone and how they affect and work together. Shareholder activism is characterized by buying shares in companies in order to put pressure on the board or management of the company. Supporters of shareholder activism believe that, if done efficiently, it is a comparatively inexpensive way of gaining influence and therefore being able to reconstruct companies both from a financial and an economical perspective. Unlike ordinary private equity buy-outs where the firm normally buys the entire corporation, activist investors seek influence rather than control. In order to create better ...view middle of the document...

” Instead of creating proposals, institutional investors are more willing to vote against board recommendations and requiring poison pills. Gilson and Gordon argue that cost of this conflict will undervalue governance rights, and activist investors will reduce this cost of “agency capitalism” and increase value. Generally, activist investors are successful only when institutional investors support the proposal of alternative strategies presented by activist investors. Funds have financial incentive to reduce the cost of their corporate governance analysis. The specialized activist investor increases the value to all institutional investors by providing options.

Supporters’ view on long-term performance
One supportive view believes that activist investor will create long-term returns and better operating performance. In the paper written by Bebchuk, Alon Brav and Wei Jiang, they examined activist targets to do empirical test, which aimed to disprove the claim of adverse effect on the long-term interest created by activist shareholders. They examined the stock price of activist target stocks five years after the target intervention month. Most of target showed the result that activist intervention improved long term stock performance. The study pointed out that activist investors always target undervalued companies.
In the following years after activist intervention, the study noted operating performance relative to peers has consistent improvement. Companies targeted by activists, on average, close two-thirds of their gap with...

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