Activist Funds, Leverage, and Procyclicality

Activist Funds, Leverage, and Procyclicality

Mike Burkart, Amil Dasgupta

Series number :

Serial Number: 

Date posted :

June 01 2014

Last revised :

June 30 2014
SSRN Share


  • shareholder activism • 
  • blockholder monitoring • 
  • Hedge Funds • 
  • competition for flow • 
  • delegated portfolio management

We develop a dual-layered agency model to study blockholder monitoring by activist funds that compete for investor flow. Competition for flow affects the manner in which activist hedge funds govern as blockholders.

In particular, funds inflate short-term performance by increasing payouts financed by (net) leverage, which discourages value-creating interventions in economic downturns due to debt overhang. Our theory links together the observed procyclicality of activist block formation with the documented effect of such funds on the leverage of their target companies. The model also generates new testable implications and reconciles seemingly contradictory empirical evidence regarding hedge fund activism.


Real name: 
Fellow, Research Member
London School of Economics and Political Science