- 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.
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.