Abstract

I estimate the implied costs of shareholder monitoring by modeling activism as a sequential decision process, in which activists choose a more hostile tactic after less confrontational approaches fail. The sequential definition provides a more accurate description of activism and motivates a structural model, which I estimate empirically using a comprehensive hand-collected dataset of 1492 hedge fund campaigns between 2000 and 2007. I find that the average activist campaign costs $10.5 million. Half of this cost comes from the proxy stage. Initial demand negotiations are the second most expensive activist tactic, followed by board representation. I also introduce a more narrow definition of campaign success, which reduces in half the previously reported success estimates. The high costs and low success rate of activism suggest that its net gains are substantially lower than previously thought.