Wolf Pack Activism

Research Retrieved: September 2017
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Issue

Effective monitoring is a key concern of corporate governance. Large block holders can potentially manage this function, but in reality, this is not often the case. Smaller investors are observed to coordinate efforts, but little is known to date about the mechanisms that motivate them. Brav, Dasgupta and Mathews (2016) theorize possible mechanisms and explain how and why smaller institutional block holders subtly join forces with larger lead activists.

Key Findings

1. Overcoming the free rider problem: Smaller institutions often lack incentives to support corporate activism, as campaign support incurs fixed costs yet delivers minimal payoffs. When portfolio managers are delegated to small institutions, private benefits can overcome this barrier and motivate them to support lead activists: if portfolio managers compete for funds from sophisticated investors, their ability to identify successful campaigns signifies skill and attracts capital. Supporting large lead activists increases the chance of activism success, and thereby also increases the opportunity to build a reputation. This encourages small institutional shareholders to detect and support activist team formation.

2. Catalytic leaders: If a large and potentially activist investor buys a stake in a firm, smaller investors with an interest to support activism campaigns are hence motivated to buy in. Brav, Dasgupta, and Mathews (2016) argue that the presence of one large activist removes the coordination issues that would otherwise exist between same-sized dispersed blocks.

3. Wolf pack formation: An entry of a large investor therefore raises the probability of activism success – the main motivation of delegated portfolio managers to support the campaign. The greater probability of success raises the opportunity cost threshold to pursue other projects – and hence spurs participation of other potentially skilled but small institutions.

 

Practical Relevance

Brav, Dasgupta, and Mathews (2016) illustrate that certain types of investors have a reason to be aware of the presence of other large investors. Understanding this motivation is crucial; first, as it could explain the observed formation of so called wolf packs in activism; second, to identify investor types that are likely supporters of activism campaigns; and finally, to identify the signals to which institutions willing to support others’ campaigns should pay attention.