The Dual Role of Shareholder Activism in the M&A Market

In this entry for the CLS BlueSky Blog, authors Francesco Celentano & Oliver Levine discuss the dual role of shareholder activists in corporate mergers and acquisitions. They examine whether activists promote M&A activity or serve as an alternative mechanism for disciplining underperforming management. The authors note that activists can both facilitate takeovers by overcoming agency frictions between management and shareholders, and reduce the need for acquisitions by pressuring management to improve operations directly.

Using a structural model that captures both direct effects of activist campaigns and the broader threat of activism on managerial behavior, the authors find that activism produces both outcomes simultaneously. Their model incorporates detailed data on firm performance, CEO turnovers, activist campaigns, and takeovers to estimate how activism affects corporate decision-making. The research accounts for equilibrium effects that traditional approaches might miss, such as how the mere possibility of an activist campaign influences manager effort and board behavior.

The findings reveal that activist involvement makes marginal takeovers more likely to complete but at lower bid premiums—approximately 13.7 percent lower than without activist presence. This reduction in takeover premiums creates winners and losers among target shareholders: those in deals that only occurred because of activist intervention gain significantly (about 15.7 percent in roughly 7 percent of cases), while shareholders in deals that would have happened anyway lose modest value due to lower premiums.

The authors’ analysis suggests that while activism breaks down barriers to takeovers, the net effect on total M&A volume is minimal because improved standalone firm performance reduces the need for disciplinary acquisitions. However, their research shows that shareholders benefit from activism through improved CEO incentives driven by the credible threat of intervention…

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