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.
Governance under the Gun: Spillover Effects of Hedge Fund Activism, was co-authored by Dr Nick Gantchev of the University of North Carolina, Oleg Gredil of Tulane University and Dr Chotibhak Jotikasthira of Southern Methodist University.
Nickolay Gantchev received his PhD in Finance from the Wharton School at the University of Pennsylvania, and completed his MBA and MS in Finance degrees at Boston College. He is currently an Assistant Professor of Finance at the University of North Carolina at Chapel Hill. Dr Gantchev’s primary research area is empirical corporate finance, with a focus on corporate governance and shareholder activism. He studies the role of institutional investors in monitoring management and improving firm governance and performance. Dr Gantchev’s publications examine the incentives of large shareholders to become active monitors and the effects of institutional trading in the emergence of hedge fund activism. His more recent papers investigate whether peer firms undertake real policy changes under the threat of activism and study specific mechanisms through which activist hedge funds influence takeover outcomes at targeted firms.