The Effect of Shareholder Activism on Corporate Divestments

Activist investors have become an established disciplinary force on financial markets through performing a monitoring function, and targeting excessively diversified firms. The management of excessively diversified firms exposes the firm to shareholder activism as it is not optimising the corporate portfolio for shareholder value creation. The reduced corporate focus of excessively diversified firms generally results in a lower financial performance of the firm, which is often reflected in a diversification discount on financial markets. Activist investors attempt to release these locked-in agency costs resulting from excessive diversification and increase total shareholder returns through proposing the divestment of unrelated corporate assets as a corrective measure for excessive diversification in the corporate portfolio. The empirical investigation in this dissertation explores the phenomenon of activist investor induced corporate divestments, and explains how management can retain the mandate for strategic portfolio decisions under shareholder pressure.