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The factor market spillover effects of shareholder activism
Author(s) -
Li Zhan
Publication year - 2021
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12258
Subject(s) - shareholder , spillover effect , business , compensation (psychology) , profit (economics) , linkage (software) , accounting , corporate governance , industrial organization , monetary economics , economics , finance , microeconomics , gene , psychology , biochemistry , chemistry , psychoanalysis
Firms and CEOs are linked in the factor market because CEO talents are transferable across different firms. Shareholder activism increases the nontarget firm's outside option and reduces the nontarget CEO's outside option. This leads to higher profit and lower CEO compensation at the nontarget firm. Due to this positive spillover, the activist's intervention is inefficiently low. As CEO talents become more transferable, monitoring, and performance improve more and CEO compensation decreases more at the nontarget firm; shareholder activism becomes less efficient due to the increased linkage between CEOs. This paper also provides a number of novel empirical predictions.