Walt Disney is among numerous companies targeted by activist investors in the last year, most recently clashing with Trian Funds’ Nelson Peltz, who waged a proxy war with the slumping media giant for a seat on the board and more influence on the bottom line. Peltz called a temporary truce when Disney CEO Bob Iger announced some $5.5 billion in cost cuts in early 2022.
Peltz’s efforts are some of the most aggressive taken by activist investors, who purchase a minority share in a company and engage with management to increase shareholder value, says Rahul Menon, an assistant professor of management at Purdue University’s Mitchell E. 
Daniels, Jr. School of Business. “Activist investing takes many forms,” he says. “As long as they have the support of shareholders, activists can try to change everything from the company's capital allocation and leadership to its stance on social responsibility.”
Menon and his coauthor, Xue Jia from the University of Melbourne, address the phenomena in a forthcoming paper titled “Voluntary Disclosure, Activist Communication and Intervention.” The research uses a model with a risk neutral manager and a risk neutral shareholder to analyze how a manager’s voluntary disclosure strategy affects an activist shareholder’s strategic choice of engaging with the firm either through communication or through direct intervention.
“Besides hostile intervention, activist shareholders aiming to make changes in target firms also use more friendly approaches such as communicating with the firm management,” Menon says. “Managers can strategically influence activist shareholders’ perceptions about the firm and in turn their choice of engagement. “
According to the researchers, many activist hedge funds are known for running hostile public campaigns to force changes at target firms. While these campaigns exert greater pressure on management, they are also costly to activists, who may choose to opt for a low-key approach and advocate for changes through positive, constructive engagement with the board and management.
“Our goal is to provide theoretical guidance on how a manager’s disclosure strategy influences the activist’s choice between friendly communication and hostile intervention,” Menon says. “We find that depending on the threat of intervention, the manager can choose to never disclose private information to the shareholder, or only disclose good news.”
Which engagement strategy is best for shareholders depends on their belief about the current firm value, which in turn is influenced by the manager’s disclosure strategy. “Communication remains the preferred strategy if the shareholder anticipates that the manager will adopt the alternative strategy,” Menon says. “However, if shareholders anticipate that the manager will reject their recommendation due to bias towards the current strategy, they will prefer to intervene directly.”
What happens in these instances is that management believes that its approach is superior to what the activists suggest, while activists think that what they suggest is superior to what management is currently doing. “That's typically what gives rise to confrontation,” Menon says. “If everybody agreed on what was good for the firm, there would be no tension or friction between shareholders and management.”
When the firm withholds information, the shareholder is uncertain about how the firm will respond to activist demands. This uncertainty induces the shareholder to use more communication when engaging with the firm. “We find that firms that are more likely to be targeted by an activist, typically firms with bad news, are less likely to disclose to influence how the activist engages with the firm,” Menon says. “As a result, activism can have a ‘chilling’ effect on corporate disclosures, particularly among firms that are most likely to benefit from the activist’s intervention.”
