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 these positive effects of activism reach beyond the targets, as non-targeted peers make similar improvements under the threat of activism. Peers with higher threat perception, as measured by director 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. Our results are not explained by time-varying industry conditions or competition effects whereby improved targets force their product market rivals to become more competitive.