Download this Paper Open PDF in Browser

Dancing with Activists

Columbia Business School Research Paper No. 17-44

Harvard Law and Economics Discussion Paper No. 906

68 Pages Posted: 10 Apr 2017 Last revised: 12 Oct 2017

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alon Brav

Duke University - Fuqua School of Business

Wei Jiang

Columbia Business School - Finance and Economics

Thomas Keusch

INSEAD

Date Written: June 1, 2017

Abstract

An important milestone often reached in the life of an activist engagement is the entering into a “settlement” agreement between the activist and the target’s board. Using a comprehensive hand-collected data set, we provide the first systematic analysis of the drivers, nature, and consequences of such settlement agreements. We identify the determinants of settlements, showing that settlements are more likely when the activist has a credible threat to win board seats in a proxy fight. We argue that, due to incomplete contracting, settlements can be expected to contract not directly on the operational or leadership changes that activists seek but rather on board composition changes that can facilitate operational and leadership changes down the road. Consistent with the incomplete contracting hypothesis, we document that settlements focus on boardroom changes and that such changes are subsequently followed by increases in CEO turnover, increased payout to shareholders, and higher likelihood of a sale or a going-private transaction. We find no evidence to support concerns that settlements enable activists to extract significant rents at the expense of other investors by introducing directors not supported by other investors or by facilitating “greenmail.” Finally, we document that stock price reactions to settlement agreements are positive and that the positive reaction is higher for “high-impact” settlements. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in its targets.

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). Columbia Business School Research Paper No. 17-44; Harvard Law and Economics Discussion Paper No. 906. Available at SSRN: https://ssrn.com/abstract=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

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alon Brav

Duke University - Fuqua School of Business ( email )

Box 90120
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

Paper statistics

Downloads
638
Rank
33,453
Abstract Views
2,292