Blockholder Trading and Monitoring, Career Concerns, and the Bright and Dark Sides of Investor 'Long-Termism'

Abstract

We model a blockholder as a fund manager caring about others' assessment of his stock-picking ability. Such a reputation-conscious fund manager acts like a investor who buys and holds, in order to positively influence how his ability is perceived. The consequent reduction in trading makes prices less informative. Career concerns also weaken the fund manager's incentive to undertake value-enhancing interventions, despite the fund's endured and large stake in the firm. Under a single blockholder structure, career concerns thus weaken the mechanisms of governance via blockholder exit and voice, thereby worsening corporate investment myopia. With multiple blockholders with heterogeneous degrees of career concerns, a reputation-conscious fund manager's weakened incentive to intervene in management provides a stronger incentive for a reputation-unconscious fund manager to undertake the intervention. Career concerns thus help overcome the free-rider problem in monitoring under a multiple blockholder structure, and may consequently encourage long-term corporate investment.