Regulating Activist Short-Termism: When Moral Hazard Meets Adverse Selection

Département: Finance 

Intervenant: Adrian Corum (Cornell University)

Salle: T305

Abstract

We study a model of activist short-termism, where the activist can sell his stake in
the target before the impact of his intervention is realized. Lower liquidity or policies
that make activists’ exit harder can increase …rm value if there is only moral hazard
(where the activist’s intervention creates more value if he exerts e¤ort) or only adverse
selection (where some interventions destroy value while others create value). However,
these changes destroy total …rm value when both moral hazard and adverse selection
are binding. Policies that reward long-termism can also destroy total …rm value, but
with a lower likelihood. The reason behind these implications is that when the moral
hazard problem is binding, a higher number of value-destroying activists results in a
higher probability of e¤ort by the value-creating activists, and as a result of this higher
e¤ort, average …rm value strictly increases. The model implies that the existence of value-
destroying blockholders can be optimal in other settings as well, such as entrepreneurship
and venture capital.