Competition for Flow and Leverage

Competition for Flow and Leverage

Mike Burkart, Amil Dasgupta

Series number :

Serial Number: 
429/2014

Date posted :

June 01 2014

Last revised :

July 30 2019
SSRN Share

Keywords

  • blockholder monitoring • 
  • Activist Hedge Funds • 
  • competition for flow • 
  • Corporate governance • 
  • 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 funds govern as blockholders.

In particular, funds inflate
short-term performance by increasing payouts financed by higher (net) leverage,
which subsequently discourages value-creating interventions in economic downturns
due to debt overhang. Our theory suggests a new channel via which asset
manager incentives may foster economic fragility and links together the observed
procyclicality of activist block formation with the documented effect of such funds
on the leverage of their target companies.

Authors

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