Job Market Paper
Monitoring by Activist Hedge Funds and Long-Term CEO Incentives
I examine the impact of hedge fund activism campaigns on target firms' long-run CEO compensation. Prior to the onset of activism, CEO pay at target firms is neither excessive nor performance insensitive, implying that target CEOs are not extracting rents. Still, post-activism, target firms have lower pay levels and lower pay-for-performance sensitivities compared to peers. Consistent with a governance substitution theory, this result suggests that outside monitoring by activists helps align the interests of shareholders and CEOs, thereby diminishing the role of expensive CEO incentives in achieving the same goal. Lower levels of pay persist even three years after the end of a campaign and two sources drive this persistent effect. First, the success of activists in implementing their governance or value-maximizing demands, whereby activists either improve the monitoring culture of the firm or put the firm on a trajectory of value enhancement. Second, the potential for governance improvement in target firms which makes monitoring by activists more effective.
Monitoring by Activist Hedge Funds and Long-Term CEO Incentives
I examine the impact of hedge fund activism campaigns on target firms' long-run CEO compensation. Prior to the onset of activism, CEO pay at target firms is neither excessive nor performance insensitive, implying that target CEOs are not extracting rents. Still, post-activism, target firms have lower pay levels and lower pay-for-performance sensitivities compared to peers. Consistent with a governance substitution theory, this result suggests that outside monitoring by activists helps align the interests of shareholders and CEOs, thereby diminishing the role of expensive CEO incentives in achieving the same goal. Lower levels of pay persist even three years after the end of a campaign and two sources drive this persistent effect. First, the success of activists in implementing their governance or value-maximizing demands, whereby activists either improve the monitoring culture of the firm or put the firm on a trajectory of value enhancement. Second, the potential for governance improvement in target firms which makes monitoring by activists more effective.
Working Papers
- Hedge Fund Activist Entry and CEO Compensation with Jana Fidrmuc
- Selection of Activism Targets
- Incentives for Bankers to Reveal Risk