Shareholder activism is a response to corporate underperformance by one or more shareholders of the corporation. Classic agency theory suggests that shareholder activism is a mechanism to curb principal-agent problems in the firm. However, the principal-principal perspective suggests that shareholder activism is a mechanism for dominant shareholders to extract resources from the firm. This dissertation extends the current research by developing and testing competing hypotheses to examine the antecedents of financially driven shareholder activism in the United States and the United Kingdom. The extant literature on financially driven shareholder activism (FDSA) is reviewed, research gaps in the literature identified and a new model of shareholder activism is introduced. Agency theory and the principal-principal perspective are used to develop eight hypotheses, which are empirically tested.
Findings show that several proxies for the principal-principal perspective are better predictors of FDSA than proxies from the principal-agent perspective. The study also shows a positive relationship between FDSA and changes in long-term market-based performance, a principal-agency prediction. The results also show that the relationship between FDSA and change in subsequent firm performance is moderated by governance environment. This study provides evidence that the principal-principal problems are not just found in emerging market countries as previous studies show, but are also a problem in developed countries like the US and the UK. In addition, this study suggests that agency theory is limited in its explanatory power. For policymakers, this study questions whether shareholder activism can act as an effective method to monitor corporate management
