Corporate Response to Hostile Activism

This paper investigates the impact of hostile activism events on corporate policies, focusing specifically on changes in leverage ratio, capital expenditures (CAPEX), and research and development (R&D) expenses. To analyze this effect, I employ various methodologies, including an unconditional comparison using matching procedures, a Difference in Differences approach, and Instrumental Variable (IV) estimation to address endogeneity concerns. The findings reveal that targeted companies tend to increase their leverage ratio and allocate more resources towards R&D expenses, while reducing their CAPEX. These results align with prior research, which suggests that firms strategically increase their leverage to serve as a defensive mechanism against hostile events. Moreover, the study identifies a shift in investment behavior, with companies allocating more towards intangible capital rather than physical goods in response to the perceived threat. Importantly, this research highlights the significance of controlling for endogeneity in the selection of treatment, as it demonstrates the potential for misleading implications when such factors are not adequately addressed. By employing rigorous methodological approaches, this study provides valuable insights into the impact of hostile activism on corporate policies and highlights the importance of considering endogeneity in similar analyses. In conclusion, the findings suggest that hostile activism events have a significant influence on corporate policies, leading to changes in leverage ratio, CAPEX, and R&D expenses. The study underscores the need for further research to better understand the underlying mechanisms and long-term implications of these policy shifts in response to hostile actions.