Finding the right fit: Value creation in activism through human capital

Abstract

I provide evidence that activist investors create value through the efficient reallocation of human capital by nominating directors at the firms they target. Stock returns are significantly higher at targeted firms when a new director is appointed and takes on a monitoring role to improve governance. Examining director biographies extracted from proxy filings, I show that effective activists match directors to firms that bring new skills and additional prior experience to the board. Consistent with directors' monitoring role and the reduction of agency problems, firms with new directors are more likely to replace the CEO and curb investment levels. Whereas prior research claims that value creation in activism is limited to takeovers, this paper shows that the human capital of directors also predicts returns for firms that are not acquired. Instrumental variables tests that exploit exogenous variation in director appointment rates indicate that the observed relationship is causal.

Keywords: Human Capital, Director labor market, Shareholder activism

JEL Classification: G34, J24