“Dear CEO and Board”: How Activist Investors’ Confidence in Tone Influences Campaign Success

Matthias Brauer (), Margarethe Wiersema () and Philipp Binder ()
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Matthias Brauer: Department of Management, University of Mannheim, 68131 Mannheim, Germany
Margarethe Wiersema: The Paul Merage School of Business, University of California, Irvine, Irvine, California 92697
Philipp Binder: Department of Management, University of Mannheim, 68131 Mannheim, Germany

Organization Science, 2023, vol. 34, issue 4, 1487-1508

Abstract: Activist hedge funds represent the most potent form of financial activism. Yet we do not fully understand how these activist investors, despite holding only a small stake in target firms, are able to influence management and the board to acquiesce to their demands, especially given the large uncertainty that their demands will improve shareholder value. Building on impression management (IM) theory, we propose that activist investors who express their concerns and demands with high confidence in their letters to target firms are likely to be perceived as knowledgeable and competent by the firm’s other shareholders, thus influencing the response of the firm’s management and board. In support of this theoretical proposition, results of our empirical analysis of 475 U.S. activist campaigns against U.S. companies between 2007 and 2019 suggest that confidence in tone in an activist’s letter, as a form of self-promotion, is positively associated with campaign success. We also observe that the positive association between confidence in tone in activist letters and campaign success is less for activists with greater success in prior campaigns and in campaigns with multiple activists. Our paper contributes to financial activism research by showing that activists’ verbal impression management can serve as an effective influence tactic in their campaigns. Our study also contributes to the emerging research stream on verbal IM by introducing a language attribute, confidence in tone, that has not been studied in management research and is distinct from past constructs examined in verbal IM research.

Keywords: activist hedge funds; financial activism; impression management; corporate governance (search for similar items in EconPapers)
Date: 2023
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