Activism's Impact on Diversified Investors and the Market

Abstract

We model activism as it affects the future distribution of prices in a portfolio con- text with risk-averse expected utility of end-of-period wealth maximizing investors. We characterize activism as affecting the mean, the variance, and/or the covariance of the target firm' s price with the prices of the other fi rms. This characterization allows us to investigate conditions under which the activist would choose to become an activist and, subsequently, to derive the sequence of equilibria that begins with the surreptitious acquisition of shares by the activist and ends at the moment of the activist s divestiture of these shares. We investigate the impact of activism not only on the target firm' s price over time and the activist s profi t, but also on the redistri- bution of portfolio holdings of all market participants that this activism induces. We propose a method to evaluate activism and show that, while activism may augment the share price of the target fi rm, there exist conditions under which activism would not necessarily increase the value of the market. Furthermore, we show that the profi t of the activist is at the expense of the group of other investors. We compare our results to recent empirical findings.