The Effect of Activists’ Short-Termism on Corporate Governance

Does activist investors’ focus on short-term stock prices impede their role in improving corporate governance? This model builds on the notion that both the act of intervention and the threat of an intervention can generate value for the target firm. We demonstrate that an activist with short-termism intervenes excessively (insufficiently) when her ability to conduct a value-enhancing intervention is low (high). However, the excessive intervention from a less capable activist can be value-enhancing, because of the disciplining effect of shareholder activism on managerial incentives. Moreover, we show that an activist with higher ability can mitigate her lack of incentives to intervene by acquiring stakes in multiple firms even when her capacity to conduct intervention is limited. Because targeting multiple firms dilutes the effect of the activist’s threat on each manager, the skilful activist conducts more value-enhancing intervention in equilibrium. Finally, when facing an activist with low ability, short-term stock-based managerial compensation disincentivizes effort. Increasing activist short-termism reduces such perverse effect.