Activist Directors and Agency Costs: What Happens When an Activist Director Goes on the Board?

The Agency Costs of Activism: Information Leakage, Thwarted Majorities, and the Public Morality

Hedge fund activism refers to the phenomenon where hedge fund investors acquire a strict minority block of shares in a target firm and then attempt to pressure management for changes in corporate policies and governance with the aim to improve firm performance. This study provides an updated empirical analysis as well as a comprehensive survey of the academic finance research on hedge fund activism. Beginning in the early 1990s, shareholder engagement by activist hedge funds has evolved to become both an investment strategy and a remedy for poor corporate governance. Hedge funds represent a group of highly incentivized, value-driven investors who are relatively free from regulatory and structural barriers that have constrained the monitoring by other external investors. While traditional institutional investors have taken actions ex-post to preserve value or contain observed damage (such as taking the “Wall Street Walk”), hedge fund activists target underperforming firms in order to unlock value and profit from the improvement. Activist hedge funds also differ from corporate raiders that operated in the 1980s, as they tend to accumulate minority equity stakes and do not seek direct control. As a result, activists must win support from fellow shareholders via persuasion and influence, representing a hybrid internal-external role in a middle-ground form of corporate governance. Research on hedge fund activism centers on how it impacts the target company, its shareholders, other stakeholders, and the capital market as a whole. Opponents of hedge fund activism argue that activists focus narrowly on short-term financial performance, and such “short-termism” may be detrimental to the long-run value of target companies. The empirical evidence, however, supports the conclusion that interventions by activist hedge funds lead to improvements in target firms, on average, in terms of both short-term metrics, such as stock value appreciation, and long-term performance, including productivity, innovation, and governance. Overall, the evidence from the full body of the literature generally supports the view that hedge fund activism constitutes an important venue of corporate governance that is both influence-based and market-driven, placing activist hedge funds in a unique position to reduce the agency costs associated with the separation of ownership and control.

'Activist' Hedge Funds: Creators of Lasting Wealth? What Do the Empirical Studies Really Say?

Gone Global: The International Diffusion of Hedge Fund Activism Outside the United States

Observing information acquisition by various market participants can yield valuable insights into the goals and strategies of investors, firms, and regulators. My dissertation uses a unique dataset, which captures 'clicks' on companies' SEC filings, to answer three questions related to hedge fund activism. First, I use activist hedge funds' views of SEC filings to proxy for negotiations between those activists and firms. I find that negotiations are common and associated with governance changes. The second essay examines the reactions of firms to elevated activist hedge fund interest. We find that firms use shareholder rights plans ('poison pills') in an effort to discourage activists' share accumulation, and that such plans are successful at decreasing the probability 13D and DEF14A filings. Finally, hedge fund activism does not occur in isolation. The third essay examines spillover effects of hedge fund activism on the emissions of the target's peer firms. We find that while hedge fund activism targets decrease their emissions, their peers increase emissions, effectively negating the direct effect. This finding is particularly strong when peers are less likely to be subject to enforcement, and face more competitive pressures. Essay 1: A portion of hedge funds' engagement can be observed through their votes and regulatory filings. However, much of their communication occurs through direct interaction with management, which is not formally recorded. I use SEC EDGAR log file data to proxy for such engagements. This proxy indeed captures hedge fund interest: one hedge fund click more than doubles the probability of an activism event. Moreover, consistent with hedge fund clicks proxying for behind-the-scenes engagement, these clicks predict corporate governance changes, for example CEO and director turnover, even in the absence of a formal activist filing. I estimate that private activism constitutes at least 31% of all hedge fund activism, and potentially as much as 89%. Private activism is particularly likely when boards have more bargaining power, as proxied by a classified board or dual class share structure, and when directors have higher reputational concerns, as proxied by these individuals having more outside board seats. Essay 2: We provide the first systematic evidence of contractual innovation in the terms of poison pill plans. In response to the increase in hedge fund activism, pills have changed to include anti-activist provisions, such as low trigger thresholds and acting-in-concert provisions. Using unique data on hedge fund views of SEC filings as a proxy for the threat of activists' interventions, we show that hedge fund interest predicts pill adoptions. Moreover, the likelihood of a 13D filing declines after firms adopt "anti-activist" pills, suggesting that pills are effective in deterring activists. The results are particularly strong for "NOL" pills that, due to tax laws, have a five percent trigger. Our analysis has implications for understanding the modern dynamics of market discipline of managers in public corporations and evaluating policies that regulate defensive tactics. Essay 3: Existing research shows that hedge fund activism decreases target firms' emissions. However, we document a negative spillover effect from hedge fund activism: hedge fund activism leads to a 1.1 percent increase in emissions by industry rivals. Evidence suggests that the increase in emissions stems from a reduction in environmentally friendly practices rather than a drop in production. The increase is larger for rival firms closer to default, with low profitability, and those operating in a competitive environment. Collectively, these results are consistent with a product market channel, where industry rivals cut environmental expenditure to compete against a more efficient target firm. Accounting for this spillover effect, an additional activism campaign, on average, leads to an increase in emissions of 135 thousand pounds at the industry level, or 0.75 percent increased emissions. Overall, our findings highlight the importance of considering spillover effects when evaluating how shareholder activism affects other stakeholders.

Activist hedge funds attempt to enhance shareholder value for their fund investors and company shareholders mainly through their active intervention in the business strategy of target firms. The objective of this article is to investigate five cases of hedge fund activism. The five activist hedge fund cases are Pirate Capital, LLC versus Walter Industries, Inc.; Shamrock Activist Value Fund versus Intrado, Inc.; MLF Investments, LLC versus Alloy, Inc.; Steel Partners II, L.P. versus Rowan Companies, Inc.; and JANA Partners, LLC versus The Houston Exploration Company. The events of the cases took place between 2003 and 2009. This article offers a unique exposition of the details of value-creating strategies pursued by activist hedge fund managers. In all the five cases examined, the target company's stock was undervalued from the hedge fund manager's perspective. Over the period, starting 10 days before the announcement of filing of Schedule 13D and ending 10 days after the filing, stock prices of target firms experienced significant increases. The initial response to the fund proposals from company management of the target company is always reluctant and unsatisfactory. Eventually all companies react favorably to hedge fund managers’ proposals. The management of the target company cannot ignore the proposals coming from informed activist shareholders. The key lesson is for company management of a target company to manage the assets of the firm efficiently; otherwise it will face the risk of a challenge to its corporate governance in the form of an attack by activist investors.

Research Summary We investigate how hedge fund activism affects firms' financial and social performance. So far, research has examined either the impact of hedge fund activism on firms' short‐term financial performance, or how other types of shareholder activism affect firms' social performance. Crossing these boundaries with data on 1,324 activist hedge fund campaigns between 2000 and 2016, we find a clear trade‐off associated with hedge fund activism: benefits are shareholder‐centric and short‐lived, reflected in immediate increases in market value and profitability; however, these increases come at a mid‐ to long‐term cost to other stakeholders, captured by decreases in operating cash flow, investment spending, and social performance. We discuss our findings from a multi‐stakeholder perspective to move beyond a polarizing debate about the merits of hedge fund activism. Managerial Summary With hedge fund activism on the rise, determining the consequences of equity ownership by activist hedge funds on target companies' short‐term and long‐term financial and social performance takes on central importance. In this study, we find hedge fund campaigns are associated with three broad sets of outcomes for targeted companies: (a) an immediate but short‐lived increase in market value and profitability, and an immediate and long‐lived decline in operating cash flow; (b) decreases in number of employees, operating expenses, R&D spending, and capital expenditures; and (c) the suppression of corporate social performance. By capturing the range of positive and negative effects on target companies, our study presents the competing implications of hedge fund activism on business and society.

The Legal Determinants of Shareholder Activism: A Theoretical and Empirical Comparative Analysis

After decades of being primarily a US-based phenomenon, the globalization of hedge fund (HF) activism is increasing at an unprecedented speed. This chapter reviews the empirical research on HF activism by systematically comparing studies conducted in the US and outside the US context. The nascent body of work on HF activism is categorized and discussed within four research sub-streams: the antecedents of HF activism; HF activists’ tactics; the responses of target firms to HF activist campaigns, and the outcomes of the latter for HF activists, target firms, and other stakeholders. Six select cases of interventions by a prominent HF activist illustrate the cross-country differences in hedge fund activist practices outlined in the literature review. The chapter concludes by outlining current research gaps and formulating research questions that could advance our knowledge on hedge fund activism in a global context.

Research Summary Activist hedge funds are the new breed of corporate raiders, yet we know little about how the management and board of target firms respond to activist investors. Using a behavioral perspective, we propose that an activist's reputation for being confrontational conveys information to the target company as to what they are likely to encounter in an activist campaign. To avoid the potential adverse consequences of engaging in such a contest, we propose and find that target companies are more likely to settle with an activist known for being confrontational. Our study contributes to corporate governance research by providing insight into the importance of the social context surrounding activist campaigns and the role of reputation in influencing how companies respond to activist investors. Managerial Summary Given that hedge fund activism is having a major impact on firm's strategic and financial decision‐making, it is important to understand how these activist investors influence companies. An activist campaign is a highly disruptive event leading to considerable ambiguity and uncertainty as to what is likely to transpire. Given this information void, our study finds that the board and management respond based on the reputation of the activist investor that has taken a stake in the company. That activist investors with a reputation for being hostile are more successful may be a defensive response on the part of management in order to avoid the potential adverse consequences of a hostile campaign. This has implications for corporate governance and the fiduciary duty of the board.

Hedge Fund Activism and Financial Performance

Research summary : Prior research suggests that hedge fund activism can benefit targeted firms. We explore a potential negative side‐effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that firms targeted by hedge fund activists experience a greater departure of valuable employees compared with a matched sample of non‐targeted firms. Further, the positive effect of hedge fund activism on firm performance is stronger when firms experience a lower departure of valuable employees. These results suggest that hedge fund activism can lead to the unwanted loss of human capital, which may reduce the otherwise positive performance effect on targeted firms. These findings contribute to research on investor activism and human capital. Managerial summary : Hedge fund activism has been shown to benefit shareholders of targeted firms. We investigate a potential negative side‐effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that targeted firms experience a greater departure of valuable employees when attacked by hedge fund activists, and that the positive performance effect of hedge fund activism is greater if that departure is smaller. Our results, together with additional analyses, are consistent with our argument that valuable employees decide to leave firms targeted by hedge fund activists to reduce the potential uncertainty and adversity for their careers, and that this human capital loss can harm firm performance. Our study has important implications for firms facing the potential prospect of hedge fund activism.

The Oxford Handbook of Hedge Funds provides a comprehensive look at the hedge fund industry from a global perspective. The chapters are organized into five main parts. After the introductory chapter in Part I, Part II begins in Chapter 2 with an analysis of the main factors that have affected the operation of hedge funds. Chapter 3 explains the concept of hedge fund flows. Chapter 4 examines hedge fund manager fees and contracts. Part III focuses on different types of hedge fund strategies. The broad array of strategies are summarized in Chapter 5. Chapter 6 empirically examines the performance of hedge fund strategies. Chapter 7 compares the strategies of hedge funds to private equity funds. Chapter 8 examines hedge fund herding. Chapter 9 examines hedge fund commodity trading advisors and leverage. Chapter 10 examines financial technology in hedge fund strategies. In Part IV, hedge fund activism in the US is examined in Chapter 11. The US and international literature on hedge fund activism is reviewed in different perspectives in Chapters 12 and 13. Case studies are provided in Chapter 14. The impact of activism on large company innovation is discussed in Chapter 15. In Part V, Chapter 16 examines whether hedge funds may engage in misreporting and fraud. Chapter 17 reviews work on hedge fund misconduct and detection. Chapter 18 discusses compliance among hedge funds. Chapter 19 examines theoretical approaches to hedge fund regulation. Chapter 20 examines optimal taxation. Chapter 21 examines hedge funds from a political economy context.

A Theory of Shareholder Activism and its Place in Corporate Law

Hedge Fund Activism: Findings and Recommendations for Corporations and Investors