Optimal Corporate Governance in the Presence of an Activist Investor

Forthcoming, Review of Financial Studies

69 Pages Posted: 18 Mar 2011 Last revised: 9 May 2013

See all articles by Jonathan B. Cohn

Jonathan B. Cohn

University of Texas at Austin

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2012

Abstract

We provide a model of governance in which a board arbitrates between an activist investor and a manager facing reputational concerns. The optimal level of internal board governance depends on both the severity of the agency conflict and the strength of external governance. Internal governance creates a certification effect, so greater intervention by the board can lead to worse managerial behavior. Internal and external governance are substitutes when external governance is weak (the board commits to an interventionist policy to induce participation from the activist) and complements when external governance is strong (the board relies to a greater extent on the activist's information).

Suggested Citation

Cohn, Jonathan B. and Rajan, Uday, Optimal Corporate Governance in the Presence of an Activist Investor (June 14, 2012). Forthcoming, Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=1787660 or http://dx.doi.org/10.2139/ssrn.1787660

Jonathan B. Cohn

University of Texas at Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-6827 (Phone)

Uday Rajan (Contact Author)

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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