Governance under the Gun: Spillover Effects of Hedge Fund Activism
|Speaker:||Nickolay Gantchev, University of North Carolina|
|Date:||Tuesday 28 March 2017|
|Location:||Constantine Leventis Teaching Room|
Hedge fund activism has been associated with substantial improvements in the governance and performance of targeted firms. In this paper, we look beyond the targets and investigate whether yet-to-be-targeted peers undertake real policy changes under the threat of activism. We find that they do – industry peers with high perception of threat increase leverage and payout, decrease cash holdings, and improve return on assets and asset turnover. Our evidence strongly suggests that such policy changes are induced by activism threat rather than time-varying industry conditions or other peer effects mechanisms, such as product market competition. In choosing which policies to change, peer firms consider both their own vulnerabilities and the actions taken by recent targets in their industry. Finally, we show that the peers’ valuations also improve, and these policy and valuation improvements lower the peers’ ex-post probability of being targeted, suggesting that this “do-it-yourself” activism is effective. Taken together, our results imply that shareholder activism, as an external governance device, reaches beyond the targeted firms.