The Role of Activist Hedge Funds’ Hostile Tactics on Governance Actions of Target Firms

Hedge fund activism is becoming an integral part of publicly traded firms, and our paper adopts a behavioral lens to examine how specific tactics employed by activist hedge funds may alter the actions of target firms. Our study draws on the theory of threat rigidity to argue that the hostility of activist hedge funds’ tactics may impede the information processing ability of executives and influence their responses. Using a sample of 763 activist hedge fund campaigns from 2002 to 2015, we find that target firms are more likely to engage in a governance action when the activist hedge fund uses more hostile tactics. Further, our findings indicate that the prior activism experience and financial performance of target firms moderate the main effects.