Economics Insights @ CBS

This essay analyzes the long-term lessons of the recent upturn and downturn in the telecommunications industry. It concludes that volatility and cyclicality will be an inherent part of the telecom sector in the future. To deal with such instabilities, companies and investors seek consolidation and cooperation. Government, too, is likely to stress stability more than before. Hence, an oligopoly is likely to emerge as the equilibrium market structure, and with it some regulation.

Using a large hand-collected data set from 2001 to 2006, we find that activist hedge funds in the United States propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism.

A wealth of research has found that power leads to behavioral approach and action. Four experiments demonstrate that this link between power and approach is broken when the power relationship is illegitimate. When power was primed to be legitimate or when power positions were assigned legitimately, the powerful demonstrated more approach than the powerless. However, when power was experienced as illegitimate, the powerless displayed as much approach as, or even more approach than, the powerful.