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TOWARDS A BEHAVIORAL THEORY OF CORPORATE OW�ERSHIP A�D SHAREHOLDER

ACTIVISM

Katarina Sikavica

Munich School of Management

Munich, Germany

Amy Hillman

Arizona State University

Phoenix, AZ, USA

Abstract

Shareholder activism is traditionally rooted in agency theory and based on financial

incentives. We argue that economic approaches to corporate ownership provide only a partial

explanation for shareholder activism and a more cognitive approach is necessary for a more

complete understanding. We propose that shareholders holding varying levels of legal and

psychological ownership develop disparate relationships with the organization, place

emphasis on different objectives and, thus, use different forms of activism (exit, voice,

loyalty).

Keywords: shareholder activism, psychological ownership, shareholder identity and

identification, property rights.

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Shareholders exert influence on organizational decisions as distinct as diversification

(e.g. Goranova, Alessandri, Brandes, & Dharwadkar, 2007; Ramaswamy, Li, & Veliyath,

2002), R&D-expenses (e.g. Lee & O’Neill, 2003), innovation (e.g. Hoskisson, Hitt, Johnson,

& Grossman, 2002), corporate social performance (e.g. Johnson & Greening, 1999) and

corporate governance (e.g. Singh & Harianto, 1989; Werner, Tosi, & Gomez-Mejia, 2005).

Moreover, shareholder activism takes many forms; in order to enforce their interests

shareholders can file proxy proposals and vote at the annual meeting (e.g.Black, 1998;

Karpoff, 2001), engage in private negotiations with management (e.g.Strickland, Wiles, &

Zenner, 1996; Wahal, 1996) and target the company via public media (e.g.Farrell & Whidbee,

2002; Wu, 2004). There is even evidence of concerted collective action by coalitions of

shareholders (cf. Black & Coffee, 1994).

Following Gillan and Starks (1998:11) we define shareholder activism as a continuum

of responses to corporate performance. When dissatisfied with company performance,

shareholders can opt for “exit, “voice” or “loyalty”(Hirschman, 1970). We use the term

“activism” to refer not only to shareholder “voice” interventions but also to exit and loyalty.

“Exit” occurs when a shareholder sells their shares in the organization; shareholders “voice”

dissatisfaction through legal intervention mechanisms such as proxy filings and/or any other

formal intervention instrument at their disposal, engaging in private negotiations with

management and directors or targeting companies publicly through the media. Finally,

shareholders who are dissatisfied with the organizations may also opt for “loyalty” or do

nothing which Hirschman (1970) argues is calculated behavior which occurs when an

individual feels attached to the organization.

Extant approaches to corporate ownership based on agency theory (Fama & Jensen,

1983; Jensen & Meckling, 1976) assume shareholder activism to be a matter of financial

incentives and cost/benefit calculus. However, empirical findings are mixed with no

conclusive evidence regarding the association between shareholder activism and shareholder

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wealth (Daily, Dalton, & Rajagopalan, 2003; Del Guercio & Hawkins, 1999; Gillan et al.,

1998; Karpoff, Malatesta, & Walking, 1996). Most notably, there is indication that some

forms of shareholder activism may negatively affect stock price. Research suggests that

public announcements of shareholder interventions may be interpreted negatively by the

market, therefore, publicity surrounding shareholders’ interventions may result in decreasing

stock returns (Karpoff, 2001). As a result, the commonly assumed financial incentives owning

shares provides appear not to be the sole driver of shareholder activism nor are they a good

proxy for shareholder behavior. These inconsistencies regarding shareholder activism prompt

the following questions: Why do shareholders opt for activism despite the fact that there are

no guaranteed financial benefits? And, given that some shareholder interventions may

negatively impact stock price, are there other tactics shareholders may choose?

Karpoff (2001) considers the motivation behind shareholder activism as the number

one issue in corporate ownership. Daily and colleagues (2003) urge scholars to recognize

differences between categories of shareholders and to expand the theoretical foundations of

shareholder activism beyond agency theory. Resolving the issue of what motivates

shareholder activism and moving beyond the conception of ownership as a “purely economic

variable” (Fiss & Zajac, 2004) can improve our understanding of the conditions under which

shareholders are valuable external governance mechanisms (Walsh & Seward, 1990). In line

with Daily and colleagues’ (2003) proposal, several recent studies make important steps

towards improving our understanding of shareholder motivation by discriminating between

categories of shareholders (e.g. David, Hitt, & Gimeno, 2001; Hoskisson et al., 2002; Kang &

Sorensen, 1999; Ramaswamy et al., 2002). However, while these studies recognize

shareholder differ, they adopt an agency view grounded solely in economic conceptions of

ownership as the basis for shareholder action, leaving open the inclusion of cognitive and

emotional approaches to corporate ownership.

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We argue that in order to understand shareholder activism more completely we need to

consider shareholders’ psychological ownership as a complement to financial incentives. We

draw on property rights, financial market and social identity theories to develop propositions

regarding how legal and psychological ownership interact to affect shareholder activism. Our

model suggests shareholders with varying levels and mixes of legal and psychological

ownership represent different relationships with the organizations and, therefore, opt for

different activism tactics.

Our study makes number of contributions: First, we integrate theories of legal

ownership and activism with the concept of psychological ownership to clarify theoretical and

empirical inconsistencies in previous research and to develop a more complete picture of

shareholders’ motivation. Second, based on our juxtaposition of levels of legal and

psychological ownership we provide a novel classification system of shareholder identities

that goes beyond types of legal shareholders. In doing so we hope our theoretical model paves

the way toward a behavioral theory of ownership.

We first elaborate on the economic conception of ownership most previous research

relies on and then juxtapose this economic conception of ownership with psychological

ownership to show how they complement each other. We then derive propositions related to

individual shareholder’s behavior dependent on his/her level and mix of legal and

psychological ownership before discussing implications of our theory and concluding our

arguments.

Extant Conceptions of Ownership and Shareholder Activism

To date, investigations of shareholder influence explicitly or implicitly rely upon an

economic conception of ownership grounded in agency theory. According to agency theory

shareholders’ primary role in corporations is the provision of capital and the bearing of

financial risk (Fama, 1980; Fama et al., 1983; Jensen et al., 1976). Since shareholders can

diversify risk by investing in a portfolio of companies, dispersed shareholdings are viewed as

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an efficient form of ownership (Jensen et al., 1976). Because shareholders’ behavior is driven

by financial incentives this implies a rather ephemeral relation with the company. If

performance declines, shareholders’ exit by selling shares. Costly voice or loyalty are not a

likely outcomes because unless a shareholder has enough shares to bear the costs of such

actions, they will sell or free-ride off others’ activism (Admati, Pfleiderer, & Zechner, 1994).

Large blockholders, therefore, are considered the most likely to engage in activism because

they have a greater financial incentive to do so and cannot easily sell their shares without

negatively impacting the firms’ market value (Shleifer & Vishny, 1986).

Based on this agency reasoning, the level of shareholdings is commonly used as a

proxy for shareholder incentives and their potential impact on corporations. The effect of

shareholders on corporate strategy and governance is assumed to be direct and the

operationalization of “ownership” is usually either a measure of ownership concentration or a

dummy for the existence of a large blockholder. Empirically, this approach has yielded

numerous positive results of shareholder influence. Concentrated ownership is related to

corporate restructuring (Bethel & Liebeskind, 1993), R&D-spending (Baysinger, Kosnik, &

Turk, 1991; Hill & Snell, 1989) and executive compensation (Tosi & Gomez-Mejia, 1989).

However, despite these results, there remains controversy regarding these effects. The studies

by Lane, Cannella and Lubatkin (1998), Amihud and Lev (1999) and Denis, Denis and Sarin

(1999) in the area of ownership concentration and diversification are examples of conflicting

results (see Lane, Cannella, & Lubatkin, 1999 for a summary). The authors attribute these

differences to disagreement over the interpretation of results and methodological flaws,

however it seems plausible to question the economic conceptions of ownership traditionally

employed in the literature.

Tsang (2006) argues that economic approaches to organizations rely on empirically

unverified behavioral assumptions and that these “reduced models” run the risk of being

unrealistic and ultimately resulting in underspecified models and potentially spurious results.

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Moreover, many scholars agree that shareholders do not have the same preferences, goals,

power or influence (e.g. Barcley & Holderness, 1991; Brickley, Lease, & Smith, 1988;

Changanti & Damanpour, 1991; Kang et al., 1999; Pound, 1988). Kang and Sorensen (Kang

et al., 1999), for example, reject the notion that financial incentives are the sole determinant of

shareholder activism and contend that owner types differ in their propensity to “capture their

property rights”. Yet while these studies discriminate between owner types they tend to

categorize owners using conventional categories of legal ownership (e.g. institutions, families,

individuals, companies).

We contend that the notion of ownership merits closer attention. Economic

conceptions of ownership borrowed from legal approaches and the property rights literature

provide only a partial explanation of shareholder behavior. We argue that shareholder

behavior is driven by both legal ownership and “psychological ownership.” While legal

ownership equips shareholders’ with legal powers and financial incentives, psychological

ownership determines shareholders’ motivation to act as owners of the company.

Property Rights and Psychological Ownership Juxtaposed

Legal ownership as conceived in the theory of property rights (Demsetz, 1967;

Furubotn & Pejovich, 1972, 1974) can be viewed as the natural complement to what social

psychologists have termed “psychological ownership” (Pierce, Kostova, & Dirks, 2001;

Pierce, Kostova, & Dirks, 2003b). Legal and psychological ownership differ with respect to

five tenets: the relationships described, the values attributed, the functions fulfilled, the

motivation evoked, and the rationale of emergence. Figure 1 compares the two.

*** Insert Figure 1 about here ***

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Legal Ownership and Property Rights

The commonly accepted conception of ownership in both agency theory and implicit

in owner typology approaches to shareholder activism is property rights (Demsetz, 1967;

Furubotn et al., 1972, 1974). Jensen and Meckling’s seminal article (1976:307) focuses on

“the behavioral implications of the property rights specified in the contracts between

managers and owners of the firm”. That is, ownership is nothing more than another

contractual relationship between two parties within the nexus of contracts that constitute the

organization (Fama, 1980; Jensen et al., 1976). Legally, ownership is viewed as a bundle of

rights specified in a contract that defines the relation between individuals with respect to a

material or immaterial object or “ownable” (Grunebaum, 1987)1. Ricketts (2002:114) states

that “ownership is not well defined” and that “assets seem not to have owners”. Instead,

“rights to use assets and to claim income flows are simply divided up between cooperating

groups of people in ways which facilitate mutual gain”. Thus, ownership in this view has very

little to do with the characteristics of the “ownable” but, rather, its essence lies in the

contractual relation between people. As Furubotn and Pejovich (1972:1139, emphasis added)

put it: “A central point noted is that property rights do not refer to relations between men and

things but, rather, to the sanctioned behavioral relations among men that arise from the

existence of things and pertain to their use. Property rights assignments specify the norms of

behavior with respect to things that each and every person must observe in interaction with

other persons or bear the costs of non-observerance.” It follows from this definition of

ownership that the value of an object depends on the bundle of property rights exchanged in

the transaction (Furubotn et al., 1972). This means that that the level of rights in the

“ownable” determines the value of that “ownable”.

The same approach to ownership is adopted with respect to shareholders, an example

is Fama who argues “ownership of capital should not be confused with ownership of the firm”

1 We use the terms “object” and “ownable” interchangeably to refer to both material and immaterial objects.

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and that “in the nexus of contracts perspective, ownership of the firm is an irrelevant concept”

(1980:290). As Kang and Sorensen (1999:131) observe, the focus on contracts between

individuals avoids difficulties associated with reification of the organization “where the

corporation is thought of as a single entity and the legal rights arising from corporate assets

are though of as indivisible”. Our concern is that in defining ownership in this way, property

rights theory can mask owners’ psychological dispositions towards the “ownable”.

From a property rights point of view, shareholders as “owners” of public corporation

hold only a small and well-defined subset of rights in that organization. Among these are the

right to dividend payments, the right to vote upon the election of directors and certain major

corporate changes, and the right to information such as accounting outcomes reported publicly

(Clark, 1986; Kang et al., 1999:126 ff.). Thus, the property rights view falls short of providing

an answer to why, if not for purely financial reasons, shareholder activism occurs or what

form it takes. We propose that the inclusion of psychological ownership results in a more

complete and accurate picture of shareholder behavior.

Psychological Ownership

But what exactly is psychological ownership? The theory of psychological ownership

(Pierce et al., 2001; Pierce et al., 2003b) suggests that ownership can be more than just a

contractual relationship between individuals. In this view ownership has not only a legal but

also a psychological dimension. As Etzioni (1991:466) argues: ownership can (but does not

have to) be both at the same time; it is a “dual creation, part attitude, part object, part in the

‘mind’, part real”. According to Pierce and colleagues (2003a:84), psychological ownership

can be understood as a “cognitive-affective state that characterizes the human condition”.

Most importantly, psychological ownership, sometimes referred to as “possession”, is not a

priori visible from the outside because for psychological ownership to occur there need not be

any observable signs. In addition, psychological ownership is not recognized by the legal

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system and therefore lacks powers codified in a set of formal rights. Instead, psychological

ownership manifests itself in feelings of possessiveness, as the subjective perception that the

object is “my”, “mine” or “ours” (Pierce et al., 2001; Pierce et al., 2003b).

As opposed to legal ownership, psychological ownership refers to the relationship

between people and things, between the owner and his “ownable”, rather than to the

relationship between two contracting parties. As a result, from the psychological point of view

the value of an object lies in the characteristics of the object and the psychological functions it

fulfills for its owner rather than in the number of rights the owner holds in that object.

Scholars argue that psychological ownership has a cognitive-utilitarian (James, 1950;

Litwinski, 1947; Rudmin, 1990) and an affective-symbolic core (Belk, 1991; Dittmar, 1991,

1992; Furby, 1978). While the former refers to the instrumental functions of the objects, the

later stands for hedonistic purposes and the pleasure of possessing that object. These functions

are strongly intertwined and more often than not occur jointly.

Litwinski (1942; 1947) emphasizes that unlike the notion of property rights in an

object, possessions are not a random and coincidental act but are acquired and maintained by

the owner in order to serve future anticipated problems. Thus, psychological ownership

differs from legal ownership in that it focuses on the reasons for acquiring and maintaining

rather than the mode of exchange of objects. Psychological ownership implies planning and at

least an initial intention to conserve the object for some amount of time while legal ownership

is rather concerned with the exchange and distribution of property rights in the object (Belk,

1991). Moreover, possessions are acquired and maintained because they enhance individuals’

feelings of efficacy (Pierce et al., 2001; Pierce et al., 2003b). Furby (1978), for example, finds

individuals feel they can impact their environment through possessions. Similarly, Beggan

(1991) finds people often use possessions to compensate for control motivations they are

unable to satisfy through mastering an ability.

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At its affective-symbolic core, psychological ownership serves hedonistic purposes.

Belk (1991) argues that some possessions become “special”, loaded with symbolic meaning

that transcends the utilitarian needs of the possessor. According to the author, in such

instances economically rational behavior is not a likely outcome. Rather, in these

circumstances individuals display a set of behavior that witness “economic irrationality” such

as being unwilling to sell the object for market value, acquiring the object with little regard

for price, and difficulty discarding the object. Furthermore, psychological ownership affects

the evaluation of an object. Several experiments show that individuals assess an object more

favorably and find it more attractive if they have feelings of possession towards it (Heider,

1958; Nuttin, 1987). Among the negative effects of psychological ownership are resistance to

organizational change, unwillingness to share property and responsibility and feelings of

being overwhelmed by the burden of responsibility (Pierce et al., 2001). Such behavior occurs

when possessions become extensions of the self by means of mastery, creation, or knowledge

of the object. As opposed to legal ownership that predominantly satisfies extrinsic motivation,

objects are viewed not as means to ends but rather an end in their own to satisfy its owners’

intrinsic needs and motivations. In the same vein, several authors propose that possessions

serve as instrumental expressions of the self and that there is a close connection between the

possession, the self, and a person’s identity (see Pierce et al., 2003b:89). In other words,

psychological ownership is accompanied feelings of being psychologically tied to an object

such that this object is viewed to be a part of the self (Furby, 1978) and a symbolic mediator

between self and other (Dittmar, 1992).

In summary, as the discussion of the differences between legal and psychological

ownership suggests, psychological ownership is a natural complement to legal ownership.

Above and beyond formally specified rights and duties governing the relationship between

people, psychological ownership suggests the value of an object is a subjective assessment of

the characteristics of that object. While legal and psychological ownership may occur jointly,

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psychological ownership is neither directly associated with legal ownership nor does it need

its financial counterpart to occur. In fact, several scholars argue (Etzioni, 1991; Furby, 1978,

1980b; Pierce et al., 2003b) psychological ownership can and does occur in the complete

absence of legal ownership. Furby’s (1978; 1980a; 1980b) cross-cultural and cross-age

studies provide compelling evidence that people do not see legal aspects of their objects to

reign supreme. Rather, the most important characteristics of an object are oftentimes their

instrumental and hedonistic functions.

From an organizational point of view, psychological ownership manifests itself when

the shareholder identifies with being an owner of the company rather than just holding a set of

property rights. It is plausible to assume that some shareholders will perceive the company as

an entity rather than a bundle of assets and therefore develop an attitude or cognitive-affective

state towards the company that goes beyond trading shares. As several scholars emphasize,

ownership is a human need imprinted in individual’s innate genetic structure (for an overview

see: Pierce et al., 2003b).

Legal Ownership and Psychological Ownership as Antecedents of Shareholder Activism

Shareholders are distinct with respect to the level and mix of legal and psychological

ownership they hold. Both dimensions are associated with motives for action and thus may

trigger some form of shareholder activism. We first examine standard or normal conditions in

which the power of shareholders is a direct and positive function of the level of their legal

shareholdings, i.e. when shareholders are independent from management (see Figure 2). We

then center on large shareholders and examine conditions under which power distributions

between management and blockholders are not clear-cut and blockholders are sensitive to

pressures emanating from the management (see Figure 3).

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Shareholder Activism in the Event of Shareholder Independence

One important characteristic that differentiates activism tactics is the degree of their

publicity. For example, while direct negotiations with management are a private form of

activism, shareholder proposals eventually become known to the financial community and

targeting via public media will reach an even larger public (Gillan et al., 1998). The level of

publicity of a tactic, be it exit or voice, will have different effects on the company’s share

price. Empirical evidence suggests the market differentiates between the announcement of

shareholder activism and the outcomes of it. In Karpoff’s (2001) review, he concludes that the

effect of the announcement of shareholder proposals on abnormal stock return, if statistically

significant in the first place, tends to be negative (e.g. Karpoff et al., 1996; Prevost & Rao,

2000) while studies that examine the impact of negotiated shareholder settlements report

positive average effects on shareholder value (e.g. Strickland et al., 1996; Wahal, 1996).

Thus, shareholders who opt for targeting the company publicly risk negatively impacting the

firm’s market value; if their primary interest is financial return they are better off avoiding

publicity.

Shareholders differ with respect to their vulnerability regarding fluctuations of the

share price and the priority they assign to stock performance and short-term returns. A

growing stream of literature suggests shareholders exhibit different preference structures and,

therefore, focus on different company objectives (Fiss et al., 2004; Kang et al., 1999; Palmer,

Friedland, Jennings, & Powers, 1987; Palmer, Jennings, & Zhou, 1993; Pedersen & Thomsen,

1997; Ramaswamy et al., 2002; Thomsen & Pedersen, 2000). We argue that the importance

and priority attached to short-term stock price performance is a result of shareholders’

psychological ownership.

*** Insert Figure 2 about here ***

For large blockholders who develop only low levels of psychological ownership

towards the company (Figure 2, upper right hand quadrant) stock performance concerns are

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particularly important. As mentioned earlier, some scholars maintain that large shareholder

interventions constitute a negative signal regarding the company’s situation (Karpoff, 2001)

but others argue such activism is positive (Kahn & Winton, 1998; Maug, 1998). Recent

investigations into the “trade-off between liquidity and control” (Coffee, 1991) show that

large shareholders are not simply left with the option to intervene because they cannot get rid

of their stakes but that, instead, large shareholders with a primary interest in stock-return may

capitalize on their private information by trying to speculate and beat the market (Maug,

1998). As Kahn and Vinton (1998) argue, when firms operate in markets characterized by

high outcome predictability and low uncertainty, large shareholders can benefit from insider

information with respect to their future action. If the rest of the market believes that the

company is doing badly, buying additional shares prior to changing the firms’ course of action

is a profit-making option. The salient point here, however, is that large blockholders use

private information with respect to the state of the company and their intervention plans in

order to reach their goals. As a result, regardless of whether blockholder activism is perceived

as positive or negative by the market, if blockholders favor short-term-returns (i.e. they have

large financial stakes but low psychological ownership) they are likely to opt for voice tactics

exhibiting low levels of publicity and prefer private negotiations and jawboning management

and directors. This even more so given that jawboning has been found to have a positive

impact on shareholder value (Strickland et al., 1996; Wahal, 1996). Thus:

P1: Shareholders exhibiting high levels of legal ownership and low levels of

psychological ownership will favor private negotiations with management over other

activism tactics.

Shareholders exhibiting both low levels of psychological ownership and low levels of

legal ownership (Figure 2, lower right hand quadrant) will pursue similar objectives as large

blockholders. Given that they primary interest is short-term financial gains they too will opt

for a strategy that generates the largest financial net benefits. However, as opposed to large

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blockholders they care less about the signals their tactics convey to the market because selling

small stakes is not likely to have an impact on the company’s market value. For the same

reason, they are unlikely to invest in expensive voice tactics. As a result, they are most likely

to opt for the exit strategy:

P2: Shareholders exhibiting low levels of legal ownership and low levels of

psychological ownership will favor exit over other activism tactics.

Shareholders who develop psychological ownership and hold legal ownership differ

with respect to their identification as owners of the company. We maintain that the social

identity as a company owner and the level of identification with owners affects shareholders’

goal priority and, as a result, on their choice of activism tactics. As several authors contend,

psychological ownership occurs when the object becomes strongly associated with self and

identity (Pierce et al., 2003b). Self and the self-concept, an individual’s cognitive structure

and the way in which individuals envisage and perceive “what makes me me and you you”

(Owens, 2003) influence the individual’s cognitions, emotions and behavior. For example,

self and the self-concept are found to have a positive impact on task-performance (Parker,

2001) and a negative impact on intergroup discrimination as well as out-group derogation

(Tarrant, North, & Hargreaves, 2001). This means that psychological ownership and the

integration of the organization into the self-concept has important consequences for

shareholder behavior and the choice of activism tactics.

An individual’s role and social identities are a critical part of his conception of self.

As such they influence individuals’ motivation and behavior. Role identities incorporate a

person’s position in a network of role relationships (Stryker, 1968; Stryker, 1980; Stryker,

1987) and are individuals’ unique internalized identifiers (McCall & Simmons, 1966). This

means that an individual’s role identity is associated with a set of expected behaviors that

come along with that particular role (e.g. father, brother, boss). Social identities, on the other

hand, are derived from groups and categories to which individuals belong (Ashfort & Mael,

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1989; Tajfel, 1974, 1978; Tajfel & Turner, 1979). According to self-categorization theory

individuals are viewed to separate groups into self-like and self-unlike members and into us

vs. them (Hogg & Terry, 2000; Turner, 1985; Turner, Hogg, Oakes, Reicher, & Wetherell,

1987). In line with social interactionism (Mead, 1934), identity theorists posit that human

behavior and interaction is shaped by actors’ self-concept and that identity is closely related to

motivation.

The identity-based conception of motivation differs substantially from the economic

notion of incentives. In general terms, economists conceive of incentives as a reason for

preferring one choice to its alternatives. Alternatives are evaluated in terms of a cost-benefit

analysis, the best choice being the one that results in the largest net benefits. This is consistent

with the idea of shareholder activism driven and determined by the level of financial

shareholdings. However, when there is a high level of psychological ownership and thus a

shareholder perceives the organization to be part of the self, the shareholder develops an

identity that incorporates the organization. In a situation that calls for action, such as is the

case in the event of performance declines or financial distress, an individual with high

psychological ownership is likely to exhibit behaviors in line with his role as owner with an

interest in the organization’s well-being and long-term survival rather than purely short-term

financial gains. As Pierce and Rogers (2004) argue, the motivational rationale of

psychological ownership lies in the link between the well-being of the target – here the

organization – and the self. An increase in the organization’s well-being results in a positive

image; a decrease in the organization’s performance results in a negative image and the

diminution of the self. Several empirical studies provide evidence regarding the relationship

between individuals’ psychological ownership and investments into the viability and well-

being of the “ownable”. For example, prior research finds psychological ownership to

effectively explain volitional behavior (Van Dyne & Pierce, 2004a; Vandevalle, Van Dyne, &

Kostova, 1995), to increase protection and defense of the possessed object (Beaglehole,

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1932), and to enhance personal sacrifice, the assumption of risk and the experience of

responsibility and stewardship by the owner (Van Dyne & Pierce, 2004b).

There are also a number of anecdotal examples of behavior by corporate owners

suggestive of psychological ownership. Family owners are perhaps the most obvious

examples of individuals who develop psychological ownership yet Ward (2005) maintains

that even family owners can choose to be “operating owners; governing owners; investing

owners; or passive owners”. He illustrates with several examples such as the German

company Haniel where several hundred family shareholders all assume a passive role; the

Indian Murugappa group where five governing owners are actively involved in both

management and governance of the company; and the Swiss company Roche along with the

Peruvian Belmont where family owners rally around a social purpose (Ward, 2005). Beyond

family owners, there is anecdotal evidence even traditional legal owners can develop

psychological ownership. For example, Steele (2005) observes “there is a growing difference

in the investment community between long-term and short-term investors. The former are

viewed as “renters of stock”, whereas the later are increasingly viewed, and are beginning to

act, as “owners” of the companies in which they invest” (Steele, 2005). David J. Winters,

CEO of the mutual fund Wintergeen Advisers states: “We don’t treat our stocks like rental

cars. You’ve got to think and act like an owner, getting the company to think better” (Farzad,

2007). Similarly, even a small shareholder may buy shares in a company because s/he loves

their product and can thus fulfill a connection to that firm as an owner. We therefore,

maintain that all shareholders have the potential to develop psychological ownership for the

companies they invest in.

The argument that shareholders with psychological ownership behave differently than

those who simply hold shares echoes the antagonism between the logic of appropriateness and

logic of consequences put forward by March and Olson. They (March, 1994; March & Olson,

1995; 2004) argue that pursuing net benefits is but one logic of rationality – the rationality of

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consequences – and that individuals also use the “logic of appropriateness”. Underlying the

logic of appropriateness is an identity-based conception of motivation. Action is viewed to be

rule-guided and rules are followed because they are deemed natural, rightful, expected and

legitimate (March, 1994). According to March and Olsen (2004:4), most of the time

individuals take reasoned action by trying to answer three elementary questions: “What kind

of situation is this? What kind of person am I? What does a person such as I do in a situation

like this?” As a result, a shareholder who identifies with being an owner of the company is

likely to behave differently than a shareholder who lacks these characteristics.

It follows from this line of thought that shareholders who feel psychological

ownership for the company and who thus identify with being an owner will opt for different

activism tactics given, firstly, that that for them ownership of the company is an end in itself

and the value of the company derives from its characteristics not only from the prospect of

financial gains. Secondly, shareholders with high levels of psychological ownership will not

only favor organizational viability and long-term survival but will also be motivated to affirm

this openly given their identity as a company’s owner. They are therefore more likely to use

activism tactics characterized by a degree of publicity. Thus, shareholders holding high levels

of psychological and high level of legal ownership (Figure 2, upper left hand quadrant) will

not shy away from costly yet often non-binding legal intervention tactics despite the fact that

these tactics might have a negative impact on short-term financial gains. As some authors

argue, large shareholders who maintain a long term relationship with the company might be

inclined to learn information about management’s efforts and convey this information to the

market (Chidambaran & John, 1998). Large shareholders who exhibit high levels of

psychological ownership are thus likely to use both: private negotiation with management and

legal intervention mechanisms.

The most salient, yet by no means only example of this behavior is family ownership.

As Habbershon, director of the Wharton Enterprising Families Initiative contends, beyond

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purely financial concerns family shareholders are often caretakers of the values, vision and

legacy of a company (author, 2001). Family owners use the powers at their disposal but, as

anecdotal evidence suggests, they seem to avoid the limelight and instead pressure

management by jawboning and formal channels (Abelson, 2000). An example of this is the

Hewlett and Packard families’ formal opposition to the Compaq merger in 2001 which was

dismissed by many Wall Street analysts to be an emotional reaction. Family owners feared

that the merger would, “among other things, put pressure on the stock price, result in massive

layoffs, and increase HP's exposure to the highly competitive, and increasingly commoditized,

personal computer business” (author, 2001:3). The planned layoffs, in particular, were not

believed to to be in line with the “HP way of management”. Given that their legal ownership

equips them with voting power, large shareholders are a salient threat to management and

therefore can successfully jawbone management. On the other hand, their assumed role and

identity as owners that accompanies their strong psychological ownership can induce them to

take advantage of legal intervention tactics despite the risk that the announcement of formal

proposals might result in a negative impact on the company’s share price in the short-term

(Karpoff et al., 1996; Prevost et al., 2000):

P3: Shareholders exhibiting high levels of legal ownership and high levels of

psychological ownership will favor private bargaining and legal intervention over

other activism tactics.

Shareholders with high levels of psychological ownership but few legal shares (Figure

2, lower left-hand quadrant) have significantly less voting power at their disposal than large

blockholders. While they share the same identity motivation as owners of the company and

are likely to prioritize long-term survival of the organization over short-term financial returns,

they are not in the position to engage in negotiations with management. Therefore, they are

likely to resort to other tactics to pressure management. One such instrument is targeting the

media to focus public attention on the firm. The stock market is a logical monitor of

19

managerial performance because stock prices incorporate performance information including

that associated with management’s ability and effort (Holmstrom & Tirole, 1993). Thus,

managers care about public scrutiny, especially when it questions their ability and

effectiveness. High levels of publicity regarding managerial and company performance are

thus a viable threat that can discipline management. Del Guercio and Hawkins (1999) find

pension funds often resort to targeting of companies via public media since their goal is to

increase shareholder influence and effectuate change rather than increasing short-term profit.

In addition, the authors cite CalPERS and CalSTRS CEOs who state that publicity is not only

a powerful but also a very cost-effective tool to motivate change despite the short-term loss of

wealth due to stock price decline following the news of intervention (Karpoff et al., 1996;

Prevost et al., 2000). Monks and Minow (1995) argue that the biggest contribution of pension

fund activism is to create awareness not only among the financial community but also among

the general public. This finding is in line with our motivation as identity argument and the

thought that shareholders with high levels of psychological ownership will hazard the

consequences of stock performance drops associated with bad news and will use any tactic

necessary to assure the company’s long term survival. For example, a recent press release by

Hermes, an institutional pension fund investor, points at the difference between “witch hunts

of whole assets” by private equity and hedge funds and “stewardship elements of ownership

of responsible investment”.2 While Hermes’ active investment agenda clearly includes social

and environmental concerns, the statement seems to go a step further. In line with our model,

Hermes’ press release quotes Mark Goyder, Founder Director of Tomorrow’s Company who

asks: “Do we see ownership as stewardship? If so, that means some obligation to the company

in which one is invested. […] Or are we seeing a divergence between two kinds of owners,

one of whom feels an obligation to the assets she or he owns and the other who sees none?”

This statement suggests some practitioners are starting to distance themselves from

2 http://www.hermes.co.uk/pdf/news_2008/080319_TC_launch_release_FINAL.pdf

20

conceptions of ownership they do not adhere to and is largely at odds with the previously

cited viewpoint by Fama (1980) that ownership of capital is not equal to ownership of the

firms. On the contrary, some shareholders are likely to develop psychological ownership for

the company they invest in even though their stake in the company is not very large. We

argue that these shareholders will adopt different intervention tactics:

P4: Shareholders exhibiting high levels of psychological ownership and low levels of

legal ownership will favor legal intervention and targeting using public media over

other activism tactics.

Shareholder Activism under Pressure Sensitivity

So far we have considered the situation under which the level of legal ownership and

property rights is directly and positively related to shareholders’ power. We have pointed out

that large shareholders are equipped not only with informal but also with formal instruments

to pressure management. However, as several authors argue, under certain conditions large

shareholders, i.e. those with high levels of legal ownership (see figure 3) will remain passive

despite their dissatisfaction with the course of action (O'Barr & Conley, 1992) or will have the

power to impact only certain decisions (Changanti et al., 1991; Dye, 1985). Brickley and

colleagues (1988) argue that differences in activism derive from shareholders’ “pressure

sensitivity.” For example, shareholders who are in a business relationship with the company

have less discretion regarding the choice of activism tactics. In these cases, shareholders are

likely to either vote with management or, if they can, sell off their shares. From the point of

view of management, these shareholders are classified as having a lower saliency because

they possess less power, legitimacy and urgency and are thus a smaller threat to management

(Mitchell, Agle, & Wood, 1997). However, in line with our conception of motivation as

identity, we argue that large pressure-sensitive shareholders will differ in their forms of

21

activism depending on the extent to which they exhibit psychological ownership for the

company and, thus, identify as the company’s owners.

*** Insert Figure 3 about here ***

Pressure-sensitive shareholders who have high levels of psychological ownership

assume a double role as: 1) the company’s owners and 2) management’s business partners.

According to identity theory, the self is structured by a hierarchical ordering of identities

which differ in salience (Stryker, 1980) or prominence (McCall & Simmons, 1978) and thus

the likelihood that they will be activated in a given situation. An identity is likely to become

salient when an individual is committed to the role relation associated with that identity

(Stryker, 1980). Thus, if a shareholder strongly identifies as management’s business partner

(pressure-sensitive) then he is likely to meet the expectations associated with that particular

role. On the other hand, if a shareholder strongly identifies with the role of company owner

(psychological ownership), then he is likely to exhibit commitment to the community of

owners and act to satisfy the requirements of this role relation. This line of reasoning bears an

important consequence with respect to the choice of activism tactics by pressure-sensitive

shareholders. Namely, those shareholders that identify with the role of a business partner are

indeed most likely to opt for what Hirschman (1970) terms “loyalty.”

Loyalty was initially conceived of as a passive but constructive tactic where the

individual waits patiently for conditions to improve and thereby giving at least minimal

support to the organization (e.g. Farrell, 1983; Rusbult, Farrell, Rogers, & Iii, 1988). In later

development of the construct, however, loyalty is less a matter of passive support and more of

helpless endurance of a situation the individual is unable to alter. For example, Withey and

Cooper (1989) argue that individuals display behavior associated with loyalty when they feel

trapped in the organization. They investigate exit, voice and loyalty in workplace situations

22

and find that when employees referred to loyalty they did not describe it as a constructive

behavior but rather as making peace and resignation with the situation. In formal terms:

P5a: Pressure-sensitive blockholders with low levels of psychological ownership will

opt for loyalty.

On the other hand, shareholders with high levels of psychological ownership and who

thus identity with the role of owner are more likely to look for ways to pursue their interests

in line with the owner identity. Given their low-power position relative to the management,

they might try to find like-minded shareholders and engage in coalition-building. As political

and resource dependence theories of organization suggest, individuals who find themselves in

situations struggling for the defense of their interests are likely to form coalitions and develop

instruments that will bolster their power vis-à-vis other coalitions (March & Simon, 1958;

Pfeffer, 1978, 1980; Pfeffer & Salancik, 1978). In fact, while in the U.S. coalitions by

shareholders are rather seldom given the restrictions emanating from the Securities and

Exchange Commission (SEC)3 (Black, 1998) there is international evidence that shareholders

engage in coalition building in order to defend their interests. For example, Black and Coffee

(1994) find that British institutional shareholders engage in coordinated efforts and are prone

to target companies jointly. The same evidence is found in Italy where shareholders’

agreements and voting trusts are a rather common occurrence (Gianfrate, 2007). Moreover, in

a recent account of his initial concept, Hirschman argued that voice can be an end in itself and

that in the event of a pursuit of public policies that have public good character a “participation

explosion” can occur that results from a “sudden enormous intensification of the preference

for public actions” (Hirschman, 1980:433). In addition, he claims that “it is in the nature of

the public good or the public happiness that striving for it cannot be neatly separated from

possessing it” (ibid.). In other words: high levels of psychological ownership can turn a cost

of shareholder activism into a benefit. Thus:

3 Shareholders who act together on a voting issue and together own 5% of a company’s shares must file a Form

13D with the SEC and risk a lawsuit if they fail to disclose their activism plans.

23

P5b: Large Pressure-sensitive blockholders with high levels of psychological

ownership will opt for coalition building and investments in collective action.

Finally, in terms of publicity, both coalition building and loyalty can be viewed in the

light of our previous propositions and shareholders’ inclination to openly act as owners of the

organization. While the choice of loyalty (likely to occur with low levels of psychological

ownership) is associated with no publicity at all, for coalition building (likely to occur with

high levels of psychological ownership) publicity is not only taken for granted but may

become an end in itself. Conveying the information of managerial failure and increasing its

public awareness may boost the solidarity between shareholders, enhance collective action

and, thus, prevent a mass selling off of shares and the erosion of the company’s market value.

Discussion and Conclusion

We raise a question here that has puzzled scholars for several decades: what motivates

corporate shareholders? In an attempt to pave the way for a behavioral theory of ownership,

we argue that the economic conception of ownership as property rights provides only a partial

explanation for shareholder behavior and that in order to understand shareholder motivation

we need to incorporate a more cognitive and emotional approach to corporate ownership. By

combining theories of legal and psychological ownership we propose a model that predicts the

form of activism a shareholder is likely to opt for. Namely, based on a motivation-as-identity

approach to activism we suggest that shareholders who identify with being an owner of the

organization will place less emphasis on short-term returns and shareholder value and will be

more likely to use tactics characterized by a certain degree of publicity that give them an

opportunity to openly act as owners to the members of the financial community and the larger

public. In addition, we argue that pressure-sensitive shareholders who exhibit low levels of

psychological ownership will opt for loyalty while pressure sensitive shareholders with high

24

levels of psychological ownership are more likely to use coalition building with other

shareholders to increase their bargaining power vis-à-vis management.

We hope our model provides not only a finer grained classification system for

corporate shareholders but also greater insight into shareholders’ motivation and behavior.

We argue that in order to assess whether and to what extent shareholders can be considered as

a viable governance mechanism we need to take into account shareholders’ cognitive

dispositions towards ownership of the company as well as the saliency of their roles and

identities. In other words, we call for a genuinely organizational theory of ownership better

suitable to account for the behavior and contributions of shareholders as “organizational

participants” (March et al., 1958; Simon, 1945, 1976).

Our model is pertinent to corporate strategy, governance and the theory of

psychological ownership. Namely, if one is ready to accept that there are important

differences among shareholders with respect to their cognition regarding the organization then

most of the studies that investigate the impact of ownership on various organizational

outcomes relying on ownership concentration or level of shareholdings as surrogates of

ownership need to be reconsidered in the light of a motivation-as-identity approach to

corporate ownership. In addition, due to an increase in internationalization and liquidity of

financial markets we are witnessing a significant increase in shareholder activism

accompanied by the recognition that there are at least two types of shareholders: those who

are more interested in the corporation and those who are more interested in the shares. As

anecdotal evidence suggests, some shareholders are more active while others are more passive

than commonly assumed. For example, some institutional investors such as hedge funds and

private equity firms who invest in listed companies are notorious for their short-term

investment horizon and their reputation for buying an undervalued corporation to “work on

it”, change it, and then sell it.. Moreover, there is a rising public policy concern that sovereign

wealth funds may exercise strategic and political influence on the western banks and

25

companies they invest. Finally, shareholders will also differ in their risk propensity and their

level of concerns over social and environmental issues. As a more recent Financial Times

article put it: “The rub is that how modern investors want the company managed depends on

who they are” (Plender, 2008). With this article we do not mean to advocate neither

shareholder democracy nor responsible investment. Rather, we maintain that organizations are

facing rising and increasingly divergent interests from shareholders and that in order to obtain

a better understanding of these interests we need a behavioral approach to corporate

ownership.

Future research could empirically investigate whether various types of shareholders

are likely to exhibit systematically different levels of psychological ownership. Pierce and

colleagues not only developed a instrument for measuring psychological ownership (Pierce,

Van Dyne, & Cummings, 1992) but also successfully applied it to the field of employee

ownership and participation plans (e.g. Pierce et al., 2004; Vandevalle et al., 1995).

Furthermore, the sparse yet insightful previous research on intercultural differences in

conceptions of ownership (Furby, 1978, 1980a, b) suggests cognitive and emotional

dispositions towards ownership might vary across cultural and institutional settings. Thus,

shareholder identities and, therefore, also the likelihood and mode of their intervention might

differ across nations and institutional systems. If psychological ownership and, thus,

shareholder behavior is, as some have argued a matter of socialization practices (Dittmar,

1992; Etzioni, 1991) then this has important implication for the institutionalization of property

rights systems into, for example, transition economies. Namely, accepting that “ownership” is

not only a legal but also a cognitive and emotional phenomenon means accepting that the

financial market system will not always be readily and frictionless amenable to “export” into

different contexts.

26

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Figure 1: Legal Ownership and Psychological Ownership Juxtaposed

Legal Ownership Psychological Ownership

Relationship Legal relationship between people Psychological relationship between

people and things

Value Value of the ownable is a matter of the

level of rights held in that object

Value of the ownable lies in its

characteristics and the functions it

fulfills for the owner

Motivation Associated with extrinsic motivation Associated with intrinsic motivation

Function Instrumental function Symbolic and instrumental function

Emergence Accrues from financial investments and

the acquisition of property rights

Accrues from social identification with

the role as owner and the group of

corporate owners

33

Figure 2: Shareholder Activism under Standard Power Distributions

+ Psychological Ownership -

strong identification with being an organizational owner and high levels of shareholdings

(P3) salient tactic: private negotiating and legal

interventions

weak identification with being an organizational owner and high levels of

shareholdings

(P1) salient tactic: private negotiations

- Legal Ownership +

strong identification with being an organizational owner and low levels of shareholdings

(P4) salient tactic: legal interventions and public

media

weak identification with being an organizational owner and weak levels of

shareholdings

(P2) salient tactic: exit

34

Figure 3: Shareholder Activism under High and Low Pressure Sensitivity

+ Psychological Ownership -

Pressure

Sensitivity

+

(P5a) salient tactic: coalition building (P5b) salient tactic: loyalty

Legal Ownership +

Pressure

Sensitivity

-

strong identification with being an organizational owner and high

levels of shareholdings

(P3) salient tactic: negotiating and legal interventions

weak identification with being an organizational owner and high

levels of shareholdings

(P1) salient tactic: negotiating

-

strong identification with being an organizational owner and low levels

of shareholdings

(P4) salient tactic: legal interventions and public media

weak identification with being an organizational owner and low levels

of shareholdings

(P2) salient tactic: exit