To Advocate or Not to Advocate: Determinants and Financial Consequences of CEO Activism

Abstract

Chief executive officers (CEOs) who engage in activism take public stands on issues that are largely unrelated to the core business of their firms. This study assesses the impact of CEO activism on shareholder value and investigates potential drivers behind the decision to advocate. We conduct an event study centred on a particular episode of CEO activism: the resignation of a group of business leaders from their roles as advisors to President Trump. We choose this setting since activism is likely to have a stronger impact when a CEO is politically connected. However, by engaging in advocacy, a CEO risks severing the very same political links that underlie the strength of the message. We find that shareholders react negatively to the decision to quit a presidential advisory council, which is consistent with a fear of weakening their firm's political influence. The decision to publicly advocate seems to be driven more by a CEO's personal political ideology than by a company's general involvement in corporate social responsibility. We also observe that managers are more likely to take a stand when they are protected by their firm's corporate governance rules. This study provides empirical evidence of the risks associated with CEO activism.

CEO activism. What do we know? What don’t we know? A systematic literature review

“…After the concrete realisation of a CEO activist’s statement (Yim, 2019), several reactions of stakeholders may occur (Durney et al , 2020). These reactions depend widely on the specific moderator categories (Murphy, 2019), and they lead to specific perceptual effects that can be classified as the final consequences of the executives’ stances (Bedendo and Siming, 2020) (Figure 4).…”

“…This often is aligned with a subjectively perceived duty to use powerful positions and take a stance for these beliefs (Mayer, 2017; Hambrick and Wowak, 2021). Bedendo and Siming (2020) comment that a “decision to publicly advocate seems to be driven more by a CEO’s personal political ideology” (p. 1) than by the firm’s strategic approach. This personal ideology in some papers is enriched by a description of top managers’ personal backgrounds to explain origins of ideological convictions (Branicki et al , 2021).…”

“…While individual studies find a positive impact on abnormal stock returns in response to CEO activism (Acharya et al , 2019; Mkrtchyan et al , 2020; Afego and Alagidede, 2021), others identified mechanisms like the firm’s relevance or investors’ political (mis)alignment that may lead to a contrary effect (Durney et al , 2020). Considering the case of several CEOs leaving the US president’s advisory council in 2017, Bedendo and Siming (2020) saw significant negative stock reactions because of investors’ fear of losing political influence. Moreover, Taylor (2018) suggests accounting for different sections of investors (e.g.…”

“…Since then, an expanding number of scholars have analysed this issue providing many valuable insights from a variety of disciplines (e.g. Bedendo and Siming, 2020; Branicki et al , 2021; Burbano, 2021; Hambrick and Wowak, 2021). These findings constitute a profound basis in the research that is still of “fertile nature” (Chatterji and Toffel, 2019, p. 180).…”

Challenges for corporate governance at the national and firm levels

“…In the banking sector, there have been differences across countries in regulatory reforms intended to foster stability and cost efficiency (Ayadi et al, 2021). Governance consequences vary in different political environments for environmental policies (Gaganis et al, 2021) and for policy changes, even in developed countries like the United States, with the rise of right‐wing populism (Bedendo & Siming, 2021). There are numerous unanswered questions arising from such research.…”