Blockholder Short-Term Incentives, Structures, and Governance

Abstract

When blockholders are reputation-conscious fund managers facing short-term incentives and caring about investors' perception of their stock-picking ability, the consequent trading reduction in bad firms' stocks weakens the efficacy of governance via blockholder exit. Under a single blockholder structure, career concerns also weaken a fund manager's incentive to undertake (public and private) value-enhancing interventions in bad firms. With multiple blockholders with heterogeneous degrees of career concerns, a reputation-conscious fund manager's weakened incentive in public intervention strengthens a reputation-unconscious fund manager's intervention incentive. As for private intervention, career concerns provide a reputation-conscious fund manager stronger incentives to privately engage with management to improve firm value to reduce trading by a reputation-unconscious fund manager, thereby enhancing the market's assessment of the reputation-conscious fund manager's stock-picking ability. Thus, although (career-concerns-induced) blockholder short-term incentives weaken governance with a single blockholder, they may help ameliorate the free-rider problem under a multiple blockholder structure, and consequently enhance blockholder governance and encourage long-term corporate investment.