Shareholder activism with strategic investors

Admati et al. (1994, Journal of Political Economy) predict that activist shareholders sell most of their shares to passive investors, which destroys the activist's incentive to engage in value-enhancing monitoring. I extend their theoretical framework by assuming a finite number of passive investors instead of a continuum. In my model, passive investors take into account the effect of their own demand for shares on the activist's incentives. As a result, they buy fewer shares from him, which increases his monitoring intensity. This is important because empirically, we observe activist investors with large blocks of shares.