Munich Personal RePEc Archive

Shareholder Activism Externalities

Li, Zhan (2017): Shareholder Activism Externalities.

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Shareholder activism increases the non-target firm’s outside option and reduces its CEO’s outside option, which leads to higher firm profit and lower CEO compensation. Due to this positive externality, the activist’s intervention is inefficiently low. Several extensions further generate a number of novel insights: The liquidity of the CEO talent market exacerbates the externality; common ownership alleviates the externality but exacerbates the free-rider problem, ultimately reducing market efficiency; regulating activists’ interventions decreases market efficiency when similar firms compete for different CEO talents.

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