Shareholder Activists and Frictions in the CEO Labor Market

Using hand-collected data on CEO appointments during shareholder activism campaigns, this study examines the relation between activist involvement in CEO recruiting and frictions in CEO hiring decisions. The results indicate that appointments of CEOs who are recruited with shareholder activist influence are associated with more favorable stock market reactions and stronger profitability improvements than appointments without activist involvement. In contrast, the author finds little evidence that shareholder influence is followed by the recruitment of CEOs who implement myopic corporate policies. Additional analyses reveal positive associations between activist involvement and (i) the amount of resources being dedicated to the CEO search process; and (ii) the propensity to recruit CEOs from outside the firm. These findings extend the CEO labor market literature, which so far focuses mainly on the decision to remove incumbent CEOs but provides limited insights into CEO recruiting.