The Unintended Consequences of Divestment

Abstract

Large divestment campaigns are undertaken in part to depress share prices of firms that investors see as engaged in harmful activities. We show that, for two reasons, these campaigns may be ineffective, even if they are large. First, they are self-defeating: because investors who divest earn lower and riskier returns than those that do not, they control a decreasing share of wealth over time, leading to the failure of even initially successful campaigns. Second, we show that, for standard managerial compensation schemes, divestment campaigns actually provide an incentive for executives to increase, not reduce, the harm that they create, making them counter-productive. Executives are induced to accede to campaigners' demands only if provided with more expensive contracts that reward short-termism. As short-termist contracts reduce shareholder welfare, they can only be implemented if campaigners control corporate boards, a goal directly contrary to the act of divestment.