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Working Paper

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This paper examines the determinants and consequences of hedge fund activism with a focuson 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 activistdirectors. We find that activists are more likely to gain board seats at smaller firms and thosewith weaker stock price performance. Activists remain as shareholders longer when they haveboard seats, with holding periods consistent with conventional notions of “long-term” institutionalinvestors. As in prior research, we find positive announcement-period returns of around4–5% when a firm is targeted by activists, and a 2% increase in return on assets over the subsequentone to five years. We find that activist directors are associated with significant strategicand operational actions by firms. We find evidence of increased divestiture, decreased acquisitionactivity, higher probability of being acquired, lower cash balances, higher payout, greaterleverage, higher CEO turnover, lower CEO compensation, and reduced investment. With theexception of the probability of being acquired, these estimated effects are generally greaterwhen activists obtain board representation, consistent with board representation being an importantmechanism for bringing about the kinds of changes that activists often demand.


Business and Corporate Communications | Corporate Finance

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Corporate Reporting and Disclosure

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Harvard Business School

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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Working Paper 14-120