Analysis of the Effect of Hedge Fund Activism on Target Firm’s CEO Compensation

Abstract

Inspired by recent academic advancement as well as real-world cases on hedge fund activism, the main purpose of this paper is to verify the potential effects of hedge fund activism on target firm’s CEO compensation. We used Propensity Score Matching and Difference-in-Differences approach to conduct the statistical analysis based on 835 analyzed samples. We found that the difference between the previous CEO pay level before hedge fund’s intervention and the post CEO pay level after hedge fund’s intervention for target firms is smaller compared to that for non-target firms. The result provides new evidence for the argument that the hedge fund’s intervention can be effective in suppressing the increase in CEO pay in hedge fund’s target firm. The study reveals a possibility that the hedge fund’s involvement in target firm can be viewed as a solution to adjust the executive pay to the reasonable level and make the executive compensation structure more based on company performance.