Governance under the Gun: Spillover Effects of Hedge Fund Activism
Hedge fund activism is associated with improvements in the governance and performance of targeted firms. In this paper, we show that the positive effects of activism reach beyond the targets, as yet-to-be-targeted peers make similar improvements under the threat of activism. Peers with higher threat awareness, as measured by board connections to past targets, are more likely to increase leverage and payout, decrease capital expenditures and cash, and improve return on assets and asset turnover. As a result, their valuations improve, and their probability of being targeted declines. Time-varying industry conditions or product market effects do not explain our results.