Working Paper: NBER ID: w26171
Authors: Lucian A. Bebchuk; Alon Brav; Wei Jiang; Thomas Keusch
Abstract: An important milestone often reached in the life of an activist engagement is entering into a “settlement” agreement between the activist and the target’s board. Using a comprehensive hand-collected data set, we analyze the drivers, nature, and consequences of such settlement agreements. Settlements are more likely when the activist has a credible threat to win board seats in a proxy fight and when incumbents’ reputation concerns are stronger. Consistent with incomplete contracting, face-saving benefits and private information considerations, settlements commonly do not contract directly on operational or leadership changes sought by the activist but rather on board composition changes. Settlements are accompanied by positive stock price reactions, and they are subsequently followed by changes of the type sought by activists, including CEO turnover, higher shareholder payouts, and improved operating performance. We find no evidence to support concerns that settlements enable activists to extract rents at the expense of other investors. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in target companies.
Keywords: activist investors; settlement agreements; corporate governance
JEL Codes: G12; G23; G32; G35; G38; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credible threat to win board seats (G34) | settlements are more likely (R23) |
| settlements (D47) | positive stock price reactions (G14) |
| settlements (D47) | board changes (G34) |
| board changes (G34) | operational changes (O30) |
| settlements (D47) | CEO turnover (M12) |
| settlements (D47) | increased shareholder payouts (G35) |
| no evidence that settlements allow activists to extract rents (D72) | lack of negative externalities (D62) |