Governance by Persuasion: Hedge Fund Activism and the Market for Corporate Influence

Abstract

This article provides a comprehensive survey of the academic finance research on hedge fund activism. We review the development, current state, and potential future trends beginning with the institutional background in which hedge fund activists operate, activists’ objectives, tactics, and the selection of target companies. We also review the various outcomes, with a focus on the financial and operating performance of targeted firms, the dynamics of engagement with fellow investors, and the impact on other stakeholders. 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 mitigate the agency costs which are fundamentally associated with the separation of ownership and control.