CEO Activism and Firm Value

In recent years, it has become increasingly common for corporate leaders to speak out on hot-button social and political issues. CEOs like Tim Cook (Apple) and Marc Benioff (Salesforce) have expressed their views in support of LGBTQ rights, Satya Nadella (Microsoft) and Mark Zuckerberg (Facebook) have been outspoken on immigration, and Bob Iger (Walt Disney) and Howard Schultz (Starbucks) have taken public stances on gun control. Conventional wisdom suggests that these CEO activism behaviors may be at odds with a CEO’s traditional role as a value-maximizing agent of the shareholders. On the other hand, survey and experimental evidence suggests that CEO activism may be the result of the demands and expectations that various stakeholders put on business leaders to speak out on important issues (Weber Shandwick and KRC Research, 2018).

In our recent working paper, we study how CEO activism impacts firm value and performance. We propose two competing hypotheses that may explain the reasons for and likely consequences of CEO activism. The alignment hypothesis –which draws from the social identity and self-determination theories in psychology – suggests that CEOs engage in activism because they believe that doing so can forge bonds with employees and customers, leading to increased firm value. When employees identify with the company, they are likely to increase their commitment to their organization, resulting in reduced employee turnover and increased employee job satisfaction (Dutton, Dukerich, and Harquail (1994); Lee, Lee, and Lum (2008)). Similarly, as customers identify more with a company, they become more “brand loyal,” potentially leading to sustained and increased sales (Bhattacharya and Sen (2003), Maignan and Ferrell (2001)).  In contrast, the misalignment hypothesis suggests that CEOs may engage in activism to secure private benefits, possibly to the detriment of relationships between the company and its stakeholders.

Our empirical study

To test these hypotheses, we compile a unique dataset of CEO activism events from news articles and tweets from 2010–2019.  We document that 38% of CEOs from S&P 500 firms take a public stance on social and political issues at least once during this ten-year period. Notably, we find an upward trend in CEO activism across the time period. The most common topics discussed by CEOs are sustainability, diversity, LGBTQ rights, and education.

Immediate stock market reactions and firm valuations

We first measure the effect of CEO activism on firm value by considering the immediate stock market reactions to these events. On average, the market responds positively when CEOs speak out on social and political issues. The returns from CEO activism are especially large when CEOs speak out on topics related to diversity. In addition, we find that the response to CEO activism is stronger among firms in highly competitive industries, those with high levels of human capital intensity, and those with shareholders who have stronger pro-social preferences.

Our second method for estimating the impact that CEO activism has on firm value focuses on each firm’s market-to-book ratio. We estimate a strong, positive relation between the number of CEO activism events a firm has in a given year and their subsequent market-to-book ratio. We perform a host of additional tests, all of which provide support for the result that CEO activism leads to increased firm value.

Effect on employees and customers

To investigate the potential mechanisms underlying the increase in corporate performance among firms with activist CEOs, we consider the relation between CEO activism and (1) employee-related outcomes and (2) customer-related outcomes. We find that firms with CEO activism experience subsequent increases in several outcomes related to employee productivity, including sales per employee, total factor productivity, and multiple measures of innovation. These results are consistent with the notion that relationships between employees and an organization can be bolstered when CEOs speak out on important social and political issues. In further support of this idea, we find that firms with activist CEOs are less likely to be involved in employee-related lawsuits. We do not, however, find meaningful evidence that consumers adjust their purchasing decisions in response to CEO activism. Specifically, we find no relation between CEO activism and a firm’s subsequent sales growth, suggesting that customer-related outcomes are less likely than employee-related outcomes to be the channel that links CEO activism to firm value.

To provide additional evidence as to which of these two channels contributes to firm value, we conducted a randomized controlled trial experiment. We randomly exposed some, but not all, experimental participants to examples of firms with CEOs that engage in activism behaviors. We find that participants who are assigned the role of job-seekers are significantly more likely to accept a job offer from a company with an activist CEO than they are to accept a job offer from a company with a CEO that avoids speaking out on social and political issues. In contrast, participants who are assigned the role of customers do not change their purchasing decisions based on a company’s level of CEO activism. These findings support our empirical results, suggesting that employee productivity – and not customer brand loyalty – drives our main results.

Effect on CEO turnover and directorships

The last thing we consider is whether CEOs benefit from their activism behaviors. Specifically, we consider whether CEOs are more or less likely to be fired after they engage in CEO activism, and we consider how CEO activism impacts their future prospects in the director labor market. We find that activist CEOs are less likely to be fired and more likely to obtain future directorships. These results suggest that the board of directors do not punish CEOs for being outspoken on social and political issues. Instead, the evidence suggests that CEOs benefit from their activism efforts via sustained and future job security.

Our contribution

Our paper contributes to the relatively new literature on CEO activism by providing the first large-scale empirical evidence on the impact of CEO activism on firm value. We also contribute to the research on corporate social responsibility, as we provide evidence that suggests that CEO activism may allow companies to build loyalty among employees, leading to increased productivity. Lastly, we contribute to the broad literature on the role of CEOs in shaping corporate culture, as our evidence suggests that CEO activism can contribute to value creation and help promote a good corporate image.

 

Anahit Mkrtchyan is the Joseph G. Riesman Research Professor and the Finance Curriculum Coordinator at the D’Amore-McKim School of Business of Northeastern University.

Jason Sandvik is an assistant professor at the A.B. Freeman School of Business of Tulane University.

Vivi Z. Zhu is a Ph.D. student at the A.B. Freeman School of Business of Tulane University.

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