Shareholder Power and Managerial Incentives

Abstract:     

This study documents increases in incentives and decreases in decision rights for the CEOs of firms targeted by hedge fund activism campaigns. Compared to untargeted matched peer firms, CEOs of target firms have lower compensation-based incentives prior to hedge fund intervention. Following activist entry, compensation incentives and the level of compensation increase abnormally for CEOs of targeted firms. These results are stronger for new CEOs recruited during the activism campaign. Further supporting the claim that activism campaigns raise CEO accountability, I find increasing risk of CEO turnover and turnover-performance sensitivity following hedge fund interventions compared to matched control firms. Target firms are more likely than matched firms to replace departing CEOs with candidates from outside the company. Moreover, activism campaigns are associated with restrictions of CEOs’ decision rights as they are followed by an increase in the likelihood of firms separating the CEO and chairman roles and by a decrease in the incidence of departing CEOs being retained on the board. Finally, activism campaigns are associated with a deterioration of incumbent CEOs’ prospects on the market for outside directorships.

Number of Pages in PDF File: 52

Keywords: shareholder activism, hedge fund activism, CEO compensation, CEO turnover, corporate governance

JEL Classification: G30, G32, G34