Hedge fund activism in family firms

Using data fron a samole of 384 Thai nonfinancial listed firms during 2003-2008, this study examines the determinants of three board structure (board size, proportion of independent directors, CEO duality) in family firms and nonfamily firms. Based on the extensive literature, family firms have uniquely gorverance, which has an impact on determinants of structure differently. This study finds that board size in family firms and nonfamily firms increase as firms grow over time amd reflect the tradeoff between the firm-speciific benefits and costs of monitoring. Family firm require higher advisory than nonfamily firm as the firm rrow, which results in the larger board size. Evidence also exists that the proportion of independent directors in family and non family firms is empirically the same. This is a positive association between propotion of independent directors and scope of operation in both firms, However, family firms' proportion of independent directors has no relationship with agency problem unlike nonfamily firms. The family firm's board leadership is observed to be higher in family firms as there are higher chances for family firm to give to CEO the chairman of the board positiion. These results indicate that family firms' directors' main role is to give advisory while nonfamily firms' directors are required more to monitor. Nonetheless, non family firms' the proportion of director is as low as family firms'. The study suggests that family firms' board structures are more suitable in low corporate governance environment than nonfamily firms in Thailand. Regulators should focus on improving nonfamily firms' corporate governance in term of the firms' proportion of independent directors.

There are two purposes in the research. One is to explore the correlation of the investment performance、corporate governance、ownership structure and related party transaction of the Taiwanese firms investing in Mainland China, and the other is explore whether the investment performance in Mainland China of the Taiwanese family firms are better than the Taiwanese non-family’s. We select companies making and selling products and listing in the TWSE and OTC as empirical samples. These companies have invested in Mainland China for the period 1998-2007. We use the multi-regression’s method to examine the hypothesis and get some import empirical conclusions or discoveries as below: 一、 Performance is better （The return of the investment is positive） 1. The correlation of the investment performance、the ratio of the held subsidiary’s stocks and the subsidiaries in Mainland China are positive，but the correlation of the investment performance and the subsidiary’s scale in Mainland China are negative；The samples of the family firms show more relevance than non-family firms’. 2. The respect of the corporate governance：The correlation of the investment performance and the controlled seats of the supervisors are positive；The samples of the family firms show more relevance than non-family firms’. 3. The respect of the ownership structure：The correlation of the investment performance、the ratio of the stocks held by directors and the ratio of the stocks held by managers are negative，but the correlation of the investment performance and the ratio of the stocks held by institutions are positive；The samples of the family firms show more relevance than non-family firms’. 4. The respect of the related party transaction and financial structure：The correlation of the investment performance and the ratio of the foreign direct investment / the net value are positive；The samples of the non-family firms show more relevance than family firms’. 二、 Performance is worse （The return of the investment is negative） 1. The correlation of the investment performance and the numbers of subsidiaries in Mainland China are positive, but the correlation of the investment performance、the subsidiary’s scale and the ratio of the held subsidiary’s stocks in Mainland China are negative；The samples of the family firms show more relevance than non-family firms’；the investment performance of the electronic industry is better than non- electronic industry’s。 2. The respect of the corporate governance：The correlation of the investment performance and the controlled seats of the director are positive；The samples of the family firms show more relevance than non-family firms’. 3. The respect of the ownership structure：The correlation of the investment performance and the ratio of the stocks held by directors are negative，but the correlation of the investment performance and the ratio of the stocks held by institutions are positive；The samples of the non-family firms show more relevance than family firms’. 4. The respect of the related party transaction and financial structure：The correlation of the investment performance、the ratio of the purchase to related party、account receivable and note of the related party and total reliability / total net value are positive；The samples of the family firms show more relevance than non-family firms’.

Observing information acquisition by various market participants can yield valuable insights into the goals and strategies of investors, firms, and regulators. My dissertation uses a unique dataset, which captures 'clicks' on companies' SEC filings, to answer three questions related to hedge fund activism. First, I use activist hedge funds' views of SEC filings to proxy for negotiations between those activists and firms. I find that negotiations are common and associated with governance changes. The second essay examines the reactions of firms to elevated activist hedge fund interest. We find that firms use shareholder rights plans ('poison pills') in an effort to discourage activists' share accumulation, and that such plans are successful at decreasing the probability 13D and DEF14A filings. Finally, hedge fund activism does not occur in isolation. The third essay examines spillover effects of hedge fund activism on the emissions of the target's peer firms. We find that while hedge fund activism targets decrease their emissions, their peers increase emissions, effectively negating the direct effect. This finding is particularly strong when peers are less likely to be subject to enforcement, and face more competitive pressures. Essay 1: A portion of hedge funds' engagement can be observed through their votes and regulatory filings. However, much of their communication occurs through direct interaction with management, which is not formally recorded. I use SEC EDGAR log file data to proxy for such engagements. This proxy indeed captures hedge fund interest: one hedge fund click more than doubles the probability of an activism event. Moreover, consistent with hedge fund clicks proxying for behind-the-scenes engagement, these clicks predict corporate governance changes, for example CEO and director turnover, even in the absence of a formal activist filing. I estimate that private activism constitutes at least 31% of all hedge fund activism, and potentially as much as 89%. Private activism is particularly likely when boards have more bargaining power, as proxied by a classified board or dual class share structure, and when directors have higher reputational concerns, as proxied by these individuals having more outside board seats. Essay 2: We provide the first systematic evidence of contractual innovation in the terms of poison pill plans. In response to the increase in hedge fund activism, pills have changed to include anti-activist provisions, such as low trigger thresholds and acting-in-concert provisions. Using unique data on hedge fund views of SEC filings as a proxy for the threat of activists' interventions, we show that hedge fund interest predicts pill adoptions. Moreover, the likelihood of a 13D filing declines after firms adopt "anti-activist" pills, suggesting that pills are effective in deterring activists. The results are particularly strong for "NOL" pills that, due to tax laws, have a five percent trigger. Our analysis has implications for understanding the modern dynamics of market discipline of managers in public corporations and evaluating policies that regulate defensive tactics. Essay 3: Existing research shows that hedge fund activism decreases target firms' emissions. However, we document a negative spillover effect from hedge fund activism: hedge fund activism leads to a 1.1 percent increase in emissions by industry rivals. Evidence suggests that the increase in emissions stems from a reduction in environmentally friendly practices rather than a drop in production. The increase is larger for rival firms closer to default, with low profitability, and those operating in a competitive environment. Collectively, these results are consistent with a product market channel, where industry rivals cut environmental expenditure to compete against a more efficient target firm. Accounting for this spillover effect, an additional activism campaign, on average, leads to an increase in emissions of 135 thousand pounds at the industry level, or 0.75 percent increased emissions. Overall, our findings highlight the importance of considering spillover effects when evaluating how shareholder activism affects other stakeholders.

'Activist' Hedge Funds: Creators of Lasting Wealth? What Do the Empirical Studies Really Say?

Hedge fund activism refers to the phenomenon where hedge fund investors acquire a strict minority block of shares in a target firm and then attempt to pressure management for changes in corporate policies and governance with the aim to improve firm performance. This study provides an updated empirical analysis as well as a comprehensive survey of the academic finance research on hedge fund activism. Beginning in the early 1990s, shareholder engagement by activist hedge funds has evolved to become both an investment strategy and a remedy for poor corporate governance. Hedge funds represent a group of highly incentivized, value-driven investors who are relatively free from regulatory and structural barriers that have constrained the monitoring by other external investors. While traditional institutional investors have taken actions ex-post to preserve value or contain observed damage (such as taking the “Wall Street Walk”), hedge fund activists target underperforming firms in order to unlock value and profit from the improvement. Activist hedge funds also differ from corporate raiders that operated in the 1980s, as they tend to accumulate minority equity stakes and do not seek direct control. As a result, activists must win support from fellow shareholders via persuasion and influence, representing a hybrid internal-external role in a middle-ground form of corporate governance. Research on hedge fund activism centers on how it impacts the target company, its shareholders, other stakeholders, and the capital market as a whole. Opponents of hedge fund activism argue that activists focus narrowly on short-term financial performance, and such “short-termism” may be detrimental to the long-run value of target companies. The empirical evidence, however, supports the conclusion that interventions by activist hedge funds lead to improvements in target firms, on average, in terms of both short-term metrics, such as stock value appreciation, and long-term performance, including productivity, innovation, and governance. Overall, 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 reduce the agency costs associated with the separation of ownership and control.

This research provides insights on factors affecting performance of family firms in comparison with the non-family firms making use of data from Cameroon. We estimated total factor productivity via a Cobb–Douglas production function while accounting for the correlation between input levels and productivity. As concerns the management and control of firms, family members are heavily involved in family firms than those of non-family firms which are mostly managed externally. It is observed that non family firms employ more labour and invests more in capital compared to family owned and managed firms. Based on the two-staged least-squares technique, results show that family firms and even those managed by families are, on average less productive than externally managed family firms and non-family owned firms after controlling for sector as well as other characteristics. The findings are important for both policy makers and practitioners.

Governing Corporations with Concentrated Ownership Structure: Can Hedge Funds Activism Play Any Role in Italy?

PurposeThe purpose of the study is to examine how operating efficiencies from incentive alignment compensate for rent extraction in family firms. The author asks whether ownership (1) improves operating efficiencies to increase firm value, (2) positively affects related-party transactions (RPTs), or (3) destroys firm value. Finally, the author assesses whether the incentive effect dominates the entrenchment effect.Design/methodology/approachThis study employs a panel of 333 listed family firms (and 185 nonfamily firms) and handles endogeneity using a dynamic panel system GMM and panel VAR.FindingsOwnership decreases discretionary expenses and increases asset utilization to add firm value. The efficiency gains generate more value in family firms, especially majority-held ones, than in nonmajority ones. However, ownership is also related to increased RPTs (especially dubious loans/guarantees), reducing firm value. RPTs destroy value more severely in the family (or group) firms than in nonfamily (nongroup) firms. It could be why ownership's positive impact on value is lower in family firms than in nonfamily firms. Overall, the incentive effect dominates the entrenchment effect and is robust to controlling private benefits of control in the dynamic ownership-value model.Research limitations/implications(1) A family firm's ownership may not be optimal. (2) The firm's long-term commitment as a dynasty limits the scale of expropriation yet sustains impetus for long-term value creation. The paradox partly explains why large family holdings and firm-specific investments endure over generations. (3) This way, large ownership substitutes weak investor protection in India despite tunneling as skin in the game provides necessary investor confidence. (4) Future studies can examine whether extraction varies with family generations and how family characteristics affect the incentive effects.Practical implications(1) Concentrated ownership may not be a wrong policy choice in emerging markets to draw firm-specific investments. (2) Investors, auditors, or creditors must pay closer attention to loans/guarantees. (3) More vigorous enforcement, auditor scrutiny, and board oversight are needed.Social implicationsFamily firms are not necessarily a bad organization type that destroys investor wealth. They can be valuably efficient due to their ownership and wealth concentration, and frugality. They matter in the economic growth of a developing market like India.Originality/value(1) Extends ownership-performance research to family firms and shows that although ownership facilitates tunneling, the incentive effect dominates; (2) family ownership is not impacted by firm value; (3) family ownership levels reduce discretionary expenses and increase asset utilization to create added value, especially in majority-held family firms; (4) RPTs and loans/guarantees increase with ownership; (5) value erosion from RPTs is higher in family (group) firms than in other firms.

Social and economic activities, like religion, entertainment, education, research, and the production of other goods and services, are carried on by different types of organizations, for example, corporations, proprietorships, partnerships, mutuals and nonprofits. There is competition among organizational forms for survival. The form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs. The characteristics of residual claims are important both in distinguishing organizations from one another and in explaining the survival of organizational forms in specific activities. This paper develops a set of propositions that explaim the special features of the residual claims of different organizational forms as efficient approaches to controlling agency problems. © M. C. Jensen and E. F. Fama, 1983 Michael C. Jensen, Foundations of Organizational Strategy Chapter 6, Harvard University Press, 1998. Journal of Law & Economics, Vol XXVI (June 1983) This document is available on the Social Science Research Network (SSRN) Electronic Library at: http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=94032 AGENCY PROBLEMS AND RESIDUAL CLAIMS

Family firms (FF) tend to be classified as less risky and volatile than nonfamily firms (NFF). This article aims to examine whether there are differences in risk and volatility between FF and NFF, using Portuguese listed firms during 2008 and 2017. Through different models and specifications, we were able to verify that there exists a positive relationship identified in the volatility-return nexus which depends on the model used, and even so, negative in the case of FF, but that volatility is stronger in NFF than in FF as descriptive statistics reveal. Furthermore, it was found no considerable differences in terms of the liquidity-volatility relationship between the two types of firms, and we cannot argue that the negative relationship between returns and turnover is higher in NFF. It was also found that more illiquid stocks have negative returns but there are no clear differences between FF and NFF. The crisis effect is more able to explain volatility positively than returns negatively, being the impact lower for NFF. Our results do not strictly confirm the fact that FF are less volatile than NFF but provided variables interaction effects we may argue that a risk-averse investor will be more prone to invest in FF stocks, while a risk lover agent will prefer to look at NFF when building their investment portfolios.

Activist Directors and Agency Costs: What Happens When an Activist Director Goes on the Board?

This study examines the initial price performance of family and non-family controlled IPO firms listed on the Australian Securities Exchange (ASX) between 1988 and 1999. Ownership and control are significant factors that influence managerial incentives, whereas the dynamics underlying family relationships reduce agency costs, improve efficiency and positively impact on firm performance. The study finds evidence of lower (15.54%) initial underpricing on the first day of trading for family firms compared with non-family IPOs (36.12%) after adjusting for industry effects. The results also show a positive and significant association between firm value and fractional ownership for both family and non-family firms, which indicates that family and non-family IPO firms use fractional ownership to signal the value of the firm. These findings provide empirical support for signalling models articulated in the literature. Implications of these differences will allow market participants to make more informed investment choices. For example, investors seeking higher immediate returns might choose to invest in non-family firms rather than in family controlled firms.

This paper argues that the structure of corporate ownership varies systematically in ways that are consistent with value maximization. Among the variables that are empirically significant in explaining the variation in ownership structure for 511 U.S. corporations are firm size, instability of profit rate, whether or not the firm is a regulated utility or financial institution, and whether or not the firm is in the mass media or sports industry. Doubt is cast on the Berle-Means thesis, as no significant relationship is found between ownership concentration and accounting profit rates for this set of firms.

This chapter examined the effects of human resource management (HRM) and market orientation strategies on competitive strategy and firm performance in family and non-family firms. It also examined how these effects varied across family and non-family firms in Ghana. Data for the study came from two different respondents within each of the 122 manufacturing firms sampled in Ghana. The results indicated that the market orientation strategy was positively related to both cost leadership and differentiation in both family and non-family firms. However, the impact of market orientation strategy on competitive strategy was not different between family and non-family firms. While HRM participation was significantly related to both cost leadership and differentiation strategies only for family firms, the impact was stronger in terms of the differentiation strategy only for family firms. Market orientation strategy was not directly related to performance for both family and non-family firms. However, the HRM strategy of human resource (HR) participation was directly related to profitability only in family firms, and the impact was stronger for family firms than for non-family firms.

PurposeThis paper aims to examine the relationship between board of directors’ characteristics and performance in family businesses. It offers evidence to the question of whether a family firm (FF) differs from a non-family firm and looks at the possibility of asymmetrical effects between periods of stability and economic adversity.Design/methodology/approachA panel data approach was applied to a sample of Portuguese firms listed the on Euronext Lisbon exchange between 2002 and 2013.FindingsThe results show that FFs are likely to have a lower proportion of independent members and higher gender diversity on their boards than non-family firms. FF performance is positively related to ownership concentration and gender diversity. There are performance premiums for family businesses, which have more gender diversity than their counterparts. These effects also depend on whether the economy is in recession. The evidence suggests that the presence of women on the board and the leverage and size of the FFs have a more significant impact on the performance in periods of economic adversity.Research limitations/implicationsOne limitation of this study is the small size of the sample as it was drawn from the Euronext Lisbon exchange, a small stock exchange market.Originality/valueThis study provides input into the academic discussion on corporate governance and FF, an area which is in need of research. In addition, the authors examine this issue in conjunction with generalised economic adversity, focusing on the possible asymmetrical effects that the nature of the board of directors may have on performance in periods of stability and those of economic adversity. The role of board of directors is crucial to the understanding of corporate behaviour and the setting of the policy that regulates corporate activities.