Are activist hedge funds good business advisors?

Abstract

Do activist hedge funds contribute to better strategic decisions in their target firms? Hedge funds are known for shaping corporate practices, yet the resulting impact of their interventions is puzzling. Using a sample of properly matched US firms subject to hedge fund-led activist campaigns, we analyse to what extent activist hedge funds influence the life cycle of their target firms. Consistent with hedge funds providing valuable business expertise, we find that target firms who are in their early life cycle stage in the prior year of the campaign are more likely than their non-targeted peers to find themselves afterwards in later stages. Further cross-sectional tests reveal that target firms benefit most from HF interventions when the campaign takes longer and the activist has higher industry experience. Overall, this study provides new evidence of the beneficial role of hedge funds as business advisors in their target firms.