Activist Directors: Determinants and Consequences

Abstract

This paper examines the determinants and consequences of hedge fund activism with a focus on activist directors, i.e., those directors appointed in response to demands by activists. Using a sample of 1,969 activism events over the period 2004–2012, we identify 824 activist directors. We find that activists are more likely to gain board seats at smaller firms and those with weaker stock price performance. Activists remain as shareholders longer when they have board seats, with holding periods consistent with conventional notions of “long-term” institutional investors. As in prior research, we find positive announcement-period returns of around 4–5% when a firm is targeted by activists, and a 2% increase in return on assets over the subsequent one to five years. We find that activist directors are associated with significant strategic and operational actions by firms. We find evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment. With the exception of the probability of being acquired, these estimated effects are generally greater when activists obtain board representation, consistent with board representation being an important mechanism for bringing about the kinds of changes that activists often demand.