Shareholder Activism: Can it be an Effective Governance Mechanism?

Sammanfattning: This paper sets out to examine whether shareholder activism can be an effective governance mechanism, i.e. if it can increase firm performance to the benefit of shareholders. We have based our study on examining and interpreting the results from previous research of the subject. Initially, we describe the theoretical constraints facing shareholder activism. Agency problems between management and shareholders introduce the need for shareholder monitoring. The incentives to monitor are limited by the free-rider problem, legislation, market liquidity and activist bargaining power. One central insight is that the cost of monitoring must be offset by the expected gains from engaging. We continue in detailing the different options commonly used by activists to influence target firms, as well as the activists themselves. Finally we examine the extent and efficiency of shareholder activism. We conclude that the amount of activism has increased during the last few years. A majority of the studies could, however, not find a link between monitoring and an increase in firm performance. Although this calls the efficiency of shareholder activism into question, the success of hedge fund activism and the fact that it circumvents several of the theoretical constraints leads us to a slightly different conclusion. Even though shareholder activists are currently unable to increase firm performance, we believe that careful design and sound legislation can potentially enable institutional investors to become effective governance mechanisms.