The Effectiveness of Verbal Mimicry in Activist Hedge Fund Campaigns

Abstract

Hedge fund activism frequently has severe consequences for target firms and their management and boards. Yet, we know little about target management and boards’ response to activist attacks. To advance our understanding in this respect, we examine how the style of target management and boards’ written communication with activists influences campaign outcomes. Building on the behavioral mimicry perspective, we propose that language style matching (LSM) and emotional tone mimicry (ETM), which constitute two distinct types of verbal mimicry, are important communication style characteristics of target management and boards’ response letters that can induce activist demand withdrawal. Though LSM and ETM are reflective of different modes of conflict behavior, we further reason based on conflict management research that ETM in conjunction with LSM is particularly effective in inducing activist demand withdrawal. The positive effects of ETM in conjunction with LSM, however, are expected to fade with increasing length of target management and boards’ written response. Results of an empirical analysis of the public communication between activists and target management and boards in 150 U.S. activist hedge fund campaigns between 2002 and 2019 support these predictions. Our study extends research on financial activism by offering a novel theoretical explanation as to why and how target management and boards can avert activist demands. Further, we contribute to behavioral mimicry research by examining the individual and joint effectiveness of distinct types of verbal mimicry in the hostile context of activist hedge fund campaigns.