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Dancing with Activists

Columbia Business School Research Paper No. 17-44

Harvard Law and Economics Discussion Paper No. 906

67 Pages Posted: 10 Apr 2017 Last revised: 27 Nov 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 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. 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. Consistent with incomplete contracting, settlements do not usually contract directly on operational or leadership changes but rather on board composition changes that can facilitate the changes activists seek, including CEO turnover, increased payout to shareholders, and 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.” 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 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

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