Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

Inertia and Conflicts of Interest


Thereisonefinalfactortoconsiderinwhethermanagersin
badlymanagedfirmsfeeltheheatfromstockholders.Ifthe
stockholdersinthesefirmsarepassiveanddon’trespondto
thepleasof acquirersorother investorsby tendering their
sharesinanacquisitionortheirproxiesinaproxycontest,it
isverylikelythatincumbentmanagerswillstayentrenched.
Institutional investors who own about 70 percent of the
outstanding stock at large, publicly traded firms are more
likelytobepassive,votingwiththeirfeet(bysellingstockin
firms that they believe arenot well managed) rather than
against management.
10 Inmanycases,theytendtogoalongwiththeincumbent
managersofthefirmsthattheyownstockin,ratherthantake
issue with their decisions.
11


Whydoinvestorsinmanyfirmsstickwithmanagersinthe
midstofpoorperformance?Forsomeinstitutionalinvestors,
likeFidelity,thatownstockinhundredsoffirms,itmaybe
theonlypracticalsolution.Afterall,activistinvestingistime
andresourceconsuminganditmaynotbefeasibleforafund
with holdings in hundreds of companies. For others, like
investmentandcommercialbanks,therearesidebenefitsthat
areobtained bymaintaininggood relationswith incumbent
managers.Thesebenefitscanoverwhelmthepotentialgains
from being more active stockholders.


Firm-Specific Constraints


Therearesomefirmswhereincumbentmanagers,nomatter
howincompetent,areprotectedfromstockholderpressureby

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