Shareholder Activism and CEO Quality

We examine the relationship between shareholder activism and managerial quality at firms targeted by activists. We decompose variations in different measures of firm performance into firm and manager components and use principal component analysis of the manager fixed effects to construct a measure of managerial ability. We find that this measure of CEO quality is a significant predictor of shareholder activism. In addition, conditional on a firm being targeted, we also find that the likelihood of the activists' demand being control-related is higher for firms with lower quality CEOs. Finally, hedge fund activists appear no different than other activists in their sensitivity to CEO quality when making control-related demands, but hedge funds are more sensitive to their percentage shareholding in the target firm when making control-related demands.