Dancing with Activists

Forthcoming, Journal of Financial Economics

Harvard Law and Economics Discussion Paper No. 906

Columbia Business School Research Paper No. 17-44

European Corporate Governance Institute (ECGI) - Finance Working Paper No. 604/2019

88 Pages Posted: 10 Apr 2017 Last revised: 15 Nov 2019

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER)

Alon Brav

Duke University - Fuqua School of Business

Wei Jiang

Columbia Business School - Finance and Economics

Thomas Keusch

INSEAD

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2017

Abstract

An important milestone often reached in the life of an activist engagement is entering into a “settlement” agreement between the activist and the target’s board. Using a comprehensive hand-collected data set, we analyze the drivers, nature, and consequences of such settlement agreements. Settlements are more likely when the activist has a credible threat to win board seats in a proxy fight and when incumbents’ reputation concerns are stronger. Consistent with incomplete contracting, face-saving benefits and private information considerations, settlements commonly do not contract directly on operational or leadership changes sought by the activist but rather on board composition changes. Settlements are accompanied by positive stock price reactions, and they are subsequently followed by changes of the type sought by activists, including CEO turnover, higher shareholder payouts, and improved operating performance. We find no evidence to support concerns that settlements enable activists to extract rents at the expense of other investors. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in target companies.

Keywords: Corporate governance, hedge fund activism, activist settlements

JEL Classification: G12, G23, G32, G34, G35, G38, K22

Suggested Citation

Bebchuk, Lucian A. and Brav, Alon and Jiang, Wei and Keusch, Thomas, Dancing with Activists (June 1, 2017). Forthcoming, Journal of Financial Economics; Harvard Law and Economics Discussion Paper No. 906; Columbia Business School Research Paper No. 17-44; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 604/2019. Available at SSRN: https://ssrn.com/abstract=2948869 or http://dx.doi.org/10.2139/ssrn.2948869

Lucian A. Bebchuk

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alon Brav

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Thomas Keusch (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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