Hedge Fund Activism: An Empirical Analysis

Abstract

This paper combines both theoretical evidence on hedge fund activism and empirical results obtained through an event study around the commencement of activism to show that the phenomenon is value-enhancing for shareholders. In particular, after defining what this form of arbitrage is, it is argued that hedge funds are best suited to engage in activism thanks to reduced conflict of interests, greater incentives to monitor, their size and less legal hurdles. Stock market reaction to announcement of activism is positive, as documented by a dataset of events from 2005 to 2008 that revealed a mean cumulative abnormal return of 4.38% on companies’ stock around the filing of Schedule 13Ds. Further analysis investigated activists’ stated goals, tactics adopted and whether the type of engagement was collaborative or hostile with existing management. Cross-sectional event study analysis by nature of approach resulted in higher abnormal returns in case of a hostile activist agenda.