The John M. Olin Center

Paper Abstract

906. Lucian A. Bebchuk, Alon Brav, Wei Jiang & Thomas Keusch, Dancing with Activists, 04/2017.

Abstract: An important milestone often reached in the life of an activist engagement is the entering into a “settlement” agreement between the activist and the target’s board. Using a comprehensive handcollected data set, we provide the first systematic analysis of the drivers, nature, and consequences of such settlement agreements. We identify the factors that determine the likelihood of a settlement, showing that the evidence is consistent with settlements being more likely when the activist has a credible threat to win board seats in a proxy fight. We argue that due to incomplete contracting settlements can be expected not to contract directly on the operational changes that activists seek but rather on changes in board composition that serve as an intermediary step for obtaining operational and leadership changes down the road. Consistent with this incomplete contracting hypothesis, we document that settlements indeed focus on changes in boardroom composition and that such settlements are subsequently followed by increases in CEO turnover, increased payout to shareholders, and higher likelihood of a sale or a going-private transaction. We find no evidence to support concerns that settlements enable activists to extract significant rents at the expense of other investors by introducing directors not supported by other investors or by facilitating “greenmail”. Finally, we document that stock price reactions to settlement agreements are positive and that the positive reaction is higher for “high impact” settlements. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in corporate value and performance.

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