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In response to activist demands, targeted firms have been shown to raise shareholder payout, boost return on assets and asset utilization, improve capital deployment and production efficiency, increase innovation output, and strengthen governance.
These positive effects often come at the expense of managers and directors who see a sharp reduction in their compensation and a higher likelihood of being replaced. Anecdotal evidence suggests that executives of yet-to-be-targeted firms are taking the threat of activism seriously and adopting a proactive approach in assessing potential vulnerabilities before an activist emerges.
In the paper, co-authors provide large-scale evidence in support of what the popular media calls “do-it-yourself activism” or “activist fire drill.” They show that managers of untargeted peer firms view the rise of activism in their industry as a threat, and undertake real policy changes to mitigate that threat. These changes mirror those advocated by activists, and are in the direction of reducing agency costs (e.g., increasing shareholder payout) and improving operating performance (e.g., increasing asset turnover). They find that these changes are indeed effective at fending off activists both by fixing problem areas that the activists often focus on and by raising the firms’ valuation which makes it more costly for an activist to enter.