Do Activists Generate Action? Examining Management Responses to Activist Hedge Fund Demands

Despite the separation of ownership and control in public corporations, non-director owners occasionally seek direct influence on firm strategy, a motive consistent with the behavioral view that firms are controlled through negotiations with powerful coalitions. Activist hedge funds (AHFs) in particular have emerged as prominent owners who seek to inform strategy, yet despite recent academic attention to their pursuits, it remains unclear the processes by which their proposals affect managerial action. Conventional logic from the corporate governance domain suggests managers would either acquiesce to the requests of the AHF, or they would remain rigid and unresponsive. Applying and extending behavioral theory, however, we theorize AHF proposals contest the conventional roles of managers and boards, and that more aggressive contestation induces greater challenges to managers’ strategic aspirations. Infusing the behavioral theory of the firm, we argue that stronger challenges lead managers to initiate search behavior through their strategic activities. We then examine AHF- and firm-related moderators—focus of the AHF, outside board experience, and managerial experience with AHF proposals—that strengthen or weaken this type of search response in ways consistent with our proposed mechanism. Examining a sample of 430 proposals sent to 145 firms from 53 AHFs between 2009 and 2020, we receive strong support for our hypotheses. Our research advances behavioral theory, as well as helps illuminate the outcomes stemming from AHF proposals, by establishing that contestation of firm leadership challenges strategic aspirations and generates search.