Browsing by Author "Kärpijoki, Juho"

This thesis aims at explaining the effects of mandatory ownership disclosure on the market for corporate control. Structurally, the discussion starts by discussing the role of shareholder activism as a rational substitute for full-scale takeovers and activists as suitable monitors for management. Thereafter the incentives for activist shareholders to engage in monitoring are discussed. This discussion emphasises the direct relationship between shareholder disclosure and the incentives to research and process information when the information costs are private but gains from the improvements in company performance are public and available to all shareholders. Finally, the discussion on the potential tragedy of the commons situation is extended to the regulatory constituents of shareholder disclosure and a uniform framework for analysing the mandatory disclosure is presented. The analysis is based on a review of empirical research that is used to support the position that shareholder activism is a rational response to mandatory disclosure and a substitute for full-scale corporate takeovers in the absence of private synergies. A review on agency theory, equity market investor segments, and the rational ignorance theorem allows for understanding why there is a fundamental conflict between the interests of the delegated management and the owners of a company, and why dedicated activist shareholders are particularly suitable for functioning as monitors and for counteracting the agency costs. Asymmetric information and the lack of perfect contracts enable the delegated management that exercises the residual control rights to extract private benefits, for example to change the risk profile of the company in order to maximise their personal utility instead of the utility of the owners, by tunnelling some of the residual income rights from the owners. The key proposition in the research is that the rules regulating the mandatory disclosure should be evaluated on a uniform basis. The reporting threshold, the reporting window, the aggregation of financial instruments, the aggregation of different investors, and the requirement for a qualitative description of the purpose of acquisition are relevant factors for assessing the incentives for stakebuilding and the profitability of shareholder activism. Evaluating these five factors together allows for constructing the effective initial disclosure threshold framework. Methodologically, the thesis relies on law and economics analysis, supported by comparative law that is used to gain understanding about the functional role of the five components of the effective initial disclosure threshold. From the viewpoint of stakebuilding, the effective initial disclosure threshold is of utmost importance for activists, while a comparison of the subsequent thresholds between the effectively similar US and UK regimes and the Continental European regime reveals significant differences in how the regimes treat blockholders. The rules adopted in different jurisdictions do not always reflect support for shareholder activism even though economic theory and empirical evidence strongly reinforce the view of its direct and indirect effects on increasing efficiency and social welfare. The most common justification for stricter transparency rules is somewhat ambiguously investor protection and the rules reflect incomplete understanding about the motives for shareholder engagement. From an information economics viewpoint, disclosure is effectively a choice between private and public information and the optimal level of transparency is necessarily a compromise between the contradictory interests. Therefore, increased transparency may not be optimal. The conclusion of this thesis is that as the incentives of an activist are contingent on uncertainty, the effective initial disclosure threshold, time, and the cost of research and that as the attraction of blockholders to disregard activist proposals depend the magnitude of private benefits, share of voting rights, and the economic interest to the company, the disclosure rules should reflect a balance between providing adequate incentives for monitoring and limiting the degree to which blockholders can covertly extract private benefits. The potential risks of the revised Shareholder Rights Directive and the community-wide shareholder identification mechanism that it introduces are discussed briefly. Shareholder identification is presented as a right, but this thesis argues that it is an obligation that risks the interests of rationally ignorant shareholders as it endangers the benefits of the indirect disciplinary effect that follows from the threat of activism.