Eyes on the Ball: Activist Campaigns and Management’s Response at the Operational Level

Abstract

More than 45% of the S&P 500 have been the target of activist investors. As a major shareholder in the firms they target, activist investors’ campaigns raise concerns over the firm’s poor performance and pose a threat to management’s control over the firm. Prior research has found that activist campaigns have significant consequences, as management curtails long-term investments, divests businesses, and foregoes acquisitions. Strategic decisions at the corporate level, however, do not provide insight as to whether activist investors motivate management to improve the operational competitiveness of the firm. Our study seeks to address whether activist campaigns succeed in motivating management to improve the firm’s operational competitiveness. This represents an important issue since the firm’s operational practices are essential to its competitiveness and performance. Our study proposes and finds that firms targeted by activist investors seek new ways by which to improve the firm’s operational efficiency and effectiveness. In addition, the management of target firms shift their emphasis to tactics that can improve the firm’s operations in the short-term. We use a measure of operational competitiveness that provides detail and granularity at a tactical level, enabling us to compare and contrast how firms respond to activist investors at the operational level of the firm. Thus, our study provides important insights not previously found that activist campaigns motivate management to improve the firm’s operational competitiveness.