The temptation of rebel shareholders

Øyvind Norli

Companies with shares that are easy to buy and sell are more tempting to shareholders who want to actively wield their power as owners.

KNOWLEDGE @BI: Shareholder activism

Some shareholders want to play an active role in the companies they buy into. They can use their power as owners to replace board members, or challenge the company's management at the annual general meeting, the company's top decision-making body.

Activist investors sense opportunities to implement changes that increase the value of the company they invest in. They want to shake up the companies whose shares they acquire, and behave like rebels to implement their ideas.

Nevertheless, it is not very often we see examples of shareholders who use their voting rights to influence the corporate governance of listed companies. Being an activist investor is costly, which is a major reason why we don’t see more cases of shareholders who challenge a company’s employed management.

Read also: Avoiding the stock exchange

Expensive activism

First of all, a rebel shareholder has to purchase a large enough stake to exercise ownership rights. He or she also needs good, but costly, legal advice. If you want to replace board members, you must also expect to fund a "campaign" to get your alternative board candidates elected.

While it is the rebel shareholder who must bear all the costs, other shareholders benefit from the profits should the initiative succeed and produce a welcome financial result. Free-riders, those who reap without sowing, are also a factor that make it less interesting to play an active ownership role.

Shedding light on the activists

Professor Øyvind Norli, Associate Professor Charlotte Østergaard and Associate Professor Ibolya Schindele, all financial researchers at BI Norwegian Business School, have conducted a study that sheds new light on the modus operandi of rebel shareholders.

The researchers have looked at all reported cases – four hundred incidents in all – of shareholder activism in US-listed companies from 1994 to 2007.

The results of the study have been published in the international scientific journal The Review of Financial Studies.

Companies with liquid shares

If it is easy to buy and sell shares in the company (high liquidity), it increases the likelihood of attracting owners who will shake up a company and take an active role in its corporate governance.

“In such companies, a shareholder can quietly purchase enough shares in the company,” explains Norli.

The BI researchers document that the shareholder activists already have a substantial stake when it becomes public that they have plans to make changes in the company.

It is considerably more difficult to quietly buy shares in companies with a low turnover of shares (low liquidity).

Overvalued companies

Some businesses can fetch a higher price in the stock market than what the company is really worth. If a rebel shareholder pushes through measures that lifts the company's real value up toward the stock market price, he will not make a profit.

If it is easy to unload a company’s shares, an activist shareholder will preferably take that route rather than absorb the costs of attempting to influence the management of the company.

Overvalued companies thus become an exception to the general tendency of more shareholder activism in companies in which it is easy to buy and sell shares.

Quietly trading shares is profitable

The researchers demonstrate that rebel shareholders trade actively before plans to actively intervene in the management of the company become known. Since we are talking about companies where the shares are readily tradable, they will be able to accumulate a significant stake without appreciably influencing the price of the shares.

On average, activist shareholders had purchased a nine per cent stake in the companies when it became known that they were going to use their investor role to influence the governance of the company. On average, they achieved a profit of 8.5 per cent on the capital with which they used to trade shares.


Norli, Øyvind, Charlotte Ostergaard and Ibolya Schindele. Liquidity and Shareholder Activism. Review of Financial Studies. First published online: October 7, 2014.

This article is published in the online news service ScienceNordic on March 17, 2015.

Link: http://sciencenordic.com/temptation-rebel-shareholders

Published 24. March 2015

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