Hedge Fund Activism, CEO Turnover and Compensation

38 Pages Posted: 18 Aug 2018

See all articles by Wonik Choi

Wonik Choi

California State University, Fullerton - Department of Accounting

James Jianxin Gong

California State University at Fullerton

Date Written: August 18, 2018


This paper examines the impact of activist hedge funds on CEO turnover, CEO pay, and the relationship between CEO pay and performance. Using difference-in-difference approach, we find that companies targeted by activist hedge funds pay higher CEO excess compensation, and provide lower pay-for-performance incentives following hedge fund activism compared to the control companies that are not subject to hedge fund activism. These results seem in contradiction with hedge fund activism improving corporate governance (Brav et al. 2008). However, we observe significantly higher CEO turnover following hedge fund activism. After we split our sample into the CEO-turnover and non-CEO-turnover sub-samples, we find that only new CEOs in targeted companies get paid excess compensation while those incumbent CEOs have no significant change following hedge fund activism. We also present that target company’s new CEOs’ average pay for performance sensitivity decreases after hedge fund intervention, while that of incumbent CEOs increases. This suggests that new CEOs are still in process of building their stock and option holding. We do not find any change in the relationship between CEO compensation and contemporaneous stock returns following hedge fund activism, but we document that incentives provided to new CEOs in target companies are positively associated with higher future abnormal stock return. Overall, our results suggest that hedge fund activism improves corporate governance and performance through removing poor-performing CEOs and motivate them to perform better using compensation contract.

Keywords: Corporate Governance, Hedge Fund Activism, Executive Compensation, CEO Turnover, and Pay for Performance

JEL Classification: G34, G38

Suggested Citation

Choi, Wonik and Gong, Jianxin, Hedge Fund Activism, CEO Turnover and Compensation (August 18, 2018). Available at SSRN: https://ssrn.com/abstract=3234018

Wonik Choi

California State University, Fullerton - Department of Accounting ( email )

P.O. Box 34080
Fullerton, CA 92834-6848
United States

Jianxin Gong (Contact Author)

California State University at Fullerton ( email )

Department of Accounting
Mihaylo College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)

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