Activist Investor

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 functioning companies with better operating performance, activist investors are considered as an effective mechanism of corporate governance.

Supporters’ view on creating values to shareholder

One concern that critics addressed is whether activist intervention increased shareholders’ value. Supporters believe that activist investors will have positive effect in strengthen shareholders’ voice and increasing the value of vote through activist intervention on corporation governance. In the paper, The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights, Gilson and Gordon point out that, corporation ownership nowadays is no longer dispersed as before. Share ownership is reconcentrated by institutional investors who “owned over 70% of the outstanding stock of the thousand largest US public companies”. These institutional investors consisted of large funds show little incentive to take the active role of monitoring their portfolios or challenging boards and management. Due to portfolio diversification, free ride problem occurs when they bear costs and obtain benefits from active participation will benefits their competitors as well. The active role of monitoring to take corrective action transfers to activist hedge funds, “who acquire a...