Shareholder Activism: Affliction for Incumbent CEOS?

Abstract

We examine CEO career consequences following shareholder activism in their companies. To address endogeneity, we employ a control function approach, using expected mutual fund flow-induced sales and purchases as exclusion restrictions. We show that CEOs targeted by activists are more likely to be dismissed earlier and less likely to retain internal executive board positions than non-targeted CEOs. We also find significantly lower growth in their remuneration, while their outside board seats remain unaffected. These effects vary across campaign hostility, activist types, and CEOs’ ex-ante resistance. First, hostile campaigns yield more adverse and persistent career effects, whereas non-hostile campaigns accelerate turnover withoutcompletely expelling CEOs from the executive labor market. Second, hedge funds in non-hostile campaigns lead to more negative CEO career outcomes compared to other activist investors; while in hostile campaigns, the career outcomes are negative for both types. Third, CEO resistance deters activism in the first place, but also mitigates negative effects from hedge fund involvement in non-hostile campaigns.

Keywords: Shareholder activism, Corporate Governance, CEO careers