Cost of shareholder engagement by institutional investors under short-swing profit rule

Abstract

Short-swing profit rule mandates insiders to disgorge short-term profits, thus preventing them from making short-swing trades. It can be imposed on investors who otherwise do not qualify as insiders, if they exercise certain shareholder engagements. This study provides a closed-form solution for the expected value of opportunity cost at the portfolio level incurred from such shareholder engagement activities. It can be decomposed into three parts: losing active alpha, not investing in the stock for newly invested money, and portfolio inefficiency. While discussions are based on case of National Pension Service of Korea, results can be universally applied.