Financial Statement Comparability and Hedge Fund Activism

Abstract

Consistent with hedge fund activism enhancing firm value, prior studies have documented significant positive abnormal stock returns arising from such activism. In this paper, we argue that the use of peer information is an important aspect of activism. We first document that higher financial statement comparability is associated with higher abnormal returns around disclosures of hedge fund activism, consistent with findings that comparability enhances firm value generated from activism. Consistent with findings on the monitoring role of comparability, we find that this positive association is stronger for firms that are more prone to agency problems, which tend to attract hedge fund activism. We also find that more experienced activists are more capable of using comparable information to create value. Consistent with findings that the availability of comparable information makes costlier tactics worthwhile, we find that greater comparability is associated with a higher likelihood of activists using hostile tactics. Finally, we document that the long-run performance of the firm post-activism is superior for more comparable firms, providing further evidence that comparability facilitates value generation by activists. Our paper contributes to the literature by providing novel and comprehensive analyses of the role of financial statement comparability in helping sophisticated investors to enhance firm value.