Activist Directors : Determinants and Consequences

This paper examines determinants and consequences of hedge fund activism, focusing on activist directors, i.e., directors appointed in response to activist demands. Using a sample of 3,259 activism events from 2004 to 2016, we identify 1,623 activist directors. Compared to other newly appointed directors, these activist directors tend to be younger, more likely to have finance and accounting skills, and less likely to be female. Activists remain as shareholders longer when they have board representation, with the holding period consistent with conventional notions of “long-term” institutional investors. We find that the likelihood of acquiring board representation is associated with weaker market performance or lower payout ratios. Following the appointment of an activist director, we find evidence of increased divestiture, decreased acquisition activity, higher CEO turnover, increased leverage, higher payouts, and reduced investment. Our analysis of data on activists’ stated demands also shows that activist directors are effective in helping activists achieve their goals, consistent with the notion that board representation is an important mechanism for activists to bring about desired changes. Finally, we find positive abnormal returns of 1% when an activist director is appointed and a 3.2%-point increase in return on assets over the subsequent five years with an activist-affiliated director