Hedge Fund Activism and Long-Term Firm Value

Abstract

This paper investigates the association of hedge fund activism and long-term firm value. We show that the positive long-term association documented in prior studies is likely affected by selection bias, as activist hedge funds tend to target poorly performing firms. Second, once we incorporate such selection bias using a matched sample approach, we find that firms targeted by activist hedge funds improve less in value after activist hedge fund campaigns than ex-ante similarly poorly performing control firms that are not subject to hedge fund activism. This suggests that hedge fund activism decreases, rather than increases, a firm’s long-term value, relative to non-targeted control firms that have similar characteristics as the targeted firms. To explain our results, we explore whether the ability of activist hedge funds to substantially influence a firm’s investment policy may exacerbate a firm’s limited commitment problem toward long-term value creation and stable stakeholder relationships. Consistent with this hypothesis, we find that the reduction in value after hedge fund campaigns is more pronounced for firms where the limited commitment problem is more severe, namely firms that are more engaged in innovation and where stakeholder relationships are more important for long-term value creation.