Recent work on hedge fund activism documents substantial abnormal returns but fails to answer the question whether these returns cover the large costs of activist campaigns. This paper provides benchmarks for monitoring costs and evaluates the net returns to activism. I model activism as a sequential decision process consisting of demand negotiations, board representation and proxy contest and estimate the costs of each distinct stage. A campaign ending in a proxy fight has average costs of $10.71 million. The proxy contest is the most expensive stage, followed by demand negotiations. The estimated monitoring costs consume more than two-thirds of gross activist returns implying that the net returns to activism are significantly lower than previously thought. Even though the mean net return is close to zero, the top quartile of activists earn higher returns on their activist holdings than on their non-activist investments. Degree Type I am grateful to Franklin Allen, Itay Goldstein, and Lucian Taylor for their invaluable guidance. I thank an anonymous referee, Ashwini Agrawal and David Denis for helpful comments and discussion. I also thank Carlos Bellon,

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Hedge fund activism is associated with improvements in the governance and performance of targeted firms. In this article, we show that these positive effects of activism reach beyond the targets, as nontargeted peers make similar improvements under the threat of activism. Peers with higher threat perception, as measured by director connections to past targets, are more likely to increase leverage and payout, decrease capital expenditures and cash, and improve return on assets and asset turnover. As a result, their valuations improve, and their probability of being targeted declines. Our results are not explained by time-varying industry conditions or competition effects whereby improved targets force their product market rivals to become more competitive.