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Not all threats are taken equally: Evidence from proxy fights
Author(s) -
Chen Fang,
Du Lijing,
Flaherty Susan M. V.,
Huang Jian,
Torna Gokhan
Publication year - 2020
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12220
Subject(s) - credibility , proxy (statistics) , business , valuation (finance) , valuation effects , accounting , monetary economics , economics , political science , computer science , law , machine learning
Previous research shows that activist threats lead to corporate policy concessions. We find that the threat of proxy fights is responded to differently based on its credibility. Decomposing proxy fight threats, we find that only credible threats are associated with more leveraged, more innovative, and less acquisitive corporate policies. Management, however, does not respond to noncredible threats. Further, for materialized fights, the market reaction at announcement is also conditional on the credibility of the threats. Overall, not all activist threats are responded to equally by management or the market, and only credible threats achieve disciplinary effects and favorable valuation.