The costs of shareholder activism : evidence from a sequential decision model

This paper provides benchmarks for monitoring costs and evaluates the net returns to shareholder activism. I model activism as a sequential decision process consisting of demand negotiations, board representation, and proxy contest and estimate the costs of each activism stage. A campaign ending in a proxy fight has average costs of $10.71 million. I find that the estimated monitoring costs reduce activist returns by more than two-thirds. The mean net activist return is close to zero but the top quartile of activists earns higher returns on their activist holdings than on their non-activist investments. The large-sample evidence presented in this paper aids in understanding the nature and evolution of activist engagements

Does shareholder coordination matter? Evidence from private placements

We propose a new role for private investments in public equity (PIPEs) as a mechanism to reduce coordination frictions among existing equity holders. We establish a causal link between the coordination ability of incumbent shareholders and PIPE issuance. This result obtains even after controlling for alternative explanations such as information asymmetry and access to public markets. Improved equity coordination following a private placement leads to favorable debt renegotiations within one year of issuance. Mitigating coordination frictions among shareholders ultimately decreases the odds of firm default in half

Institutional trading and hedge fund activism

This paper investigates the role of institutional trading in the emergence of hedge fund activism—an important corporate governance mechanism. We demonstrate that institutional sales raise a firm’s probability of becoming an activist target. Furthermore, by exploiting the funding circumstances of individual institutions, we establish that such effects occur through a liquidity channel, i.e., the activist camouflages his purchases among other institutions’ liquidity sales. Additional evidence supports our conclusion. First, activist purchases closely track institutional sales at the daily frequency. Second, such synchronicity is stronger among targets with lower expected monitoring benefits, suggesting that gains from trading with other institutions supplement these benefits in the activist’s targeting decision. Finally, we find that institutional sales accelerate the timing of a campaign at firms already followed by activists rather than attract attention to unlikely targets. Taken together, our findings offer a novel empirical perspective on the liquidity theories of activism; while activists screen firms on the basis of fundamentals, they pick specific targets at a particular time by exploiting institutional liquidity shocks

Activism mergers

Shareholder value creation from hedge fund activism occurs primarily by influencing takeover outcomes for targeted firms. Controlling for selection decisions, activist interventions substantially increase the probability of a takeover offer. Third-party bids for targets have higher returns, premia, and completion rates, but these patterns reverse when the activist is the bidder. Failed bids for activism targets lead to improvements in operating performance, financial policy, and positive long-term abnormal returns, suggesting that activism enhances value. The positive long-term performance from hedge fund activism arises from monitoring target management during merger and acquisition contests and not from target undervaluation or bidder overpayment

Erazmo Handel, Sjećanja, prevela Vlasta Švoger, priredio Marko Trogrlić. Zagreb: Dom i svijet, 2007., 165 str.

Using hand-collected data on succession planning disclosures, we study how having a formal succession plan affects the efficiency of CEO turnovers. We find that firms with succession plans have a lower likelihood of forced CEO turnovers and non-CEO executive team resignations. They also experience lower uncertainty around successions and faster learning about the incoming CEO’s ability. Additionally, these firms implement more sophisticated performance evaluation procedures and are less reliant on exogenous factors in making CEO dismissal decisions. These results are not explained by firm-specific attributes and demonstrate that succession planning leads to significant improvements in the efficiency of management turnovers.

Sustainability or performance? Ratings and fund managers’ incentives

We explore how mutual fund managers and investors react when the tradeoff between a fund's sustainability and performance becomes salient. Following the introduction of Morningstar's sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks to attract flows. Such sustainability-driven trades, however, underperformed, impairing the funds’ overall performance. Consequently, a tradeoff between sustainability and performance emerged. In the new equilibrium, the globe ratings do not affect investor flows and funds no longer trade to improve their globe ratings

Governance under the gun : spillover effects of hedge fund activism

Hedge fund activism is associated with improvements in the governance and performance of targeted firms. In this article, we show that these positive effects of activism reach beyond the targets, as nontargeted peers make similar improvements under the threat of activism. Peers with higher threat perception, as measured by director connections to past targets, are more likely to increase leverage and payout, decrease capital expenditures and cash, and improve return on assets and asset turnover. As a result, their valuations improve, and their probability of being targeted declines. Our results are not explained by time-varying industry conditions or competition effects whereby improved targets force their product market rivals to become more competitive

The Costs of Shareholder Activism: Evidence from a Sequential Decision Model

Recent work on hedge fund activism documents substantial abnormal returns but fails to answer the question whether these returns cover the large costs of activist campaigns. This paper provides benchmarks for monitoring costs and evaluates the net returns to activism. I model activism as a sequential decision process consisting of demand negotiations, board representation and proxy contest and estimate the costs of each distinct stage. A campaign ending in a proxy fight has average costs of $10.71 million. The proxy contest is the most expensive stage, followed by demand negotiations. The estimated monitoring costs consume more than two-thirds of gross activist returns implying that the net returns to activism are significantly lower than previously thought. Even though the mean net return is close to zero, the top quartile of activists earn higher returns on their activist holdings than on their non-activist investments