Institutional Investment Horizon and Hedge Fund Activism

Abstract

I examine how institutional investment horizon affects hedge fund activism. I find that hedge fund activism is higher in firms that long-term institutional investors invest. Furthermore, hedge fund campaigns and success rates differ with investment horizon of institutions. Firms with investors that have long-term investment horizons are more likely to receive demands on corporate governance improvements. These firms also experience significant improvement in firm performance post shareholder activism. Firms that are targeted by hedge funds and have institutional investors with shorter-term investment horizons, on the other hand, are more likely to be delisted. Also, there is no significant performance improvement in these firms post activism. Overall, the results suggest that investment horizon of institutional owners is an important factor in explaining strategies explored in hedge fund activism as well as their effects on firm value. The findings support the notion of collaborative monitoring role of long-term institutional investors and hedge fund activists.