Intra-Industry Effects of Shareholder Activism - Market Reactions to Hedge Fund and Private Equity Investments

Abstract

This paper investigates the valuation effects of industry rivals to firms targeted by hedge funds and private equity investors. We argue that both types of investors differ from other blockholders due to their strong motivation and ability to actively engage and monitor. By changing a target firms' objective functions toward more of a shareholder value orientation, we find that the new institutional investors improve firm operating performance. We find that the announcement of a change in ownership structure generates statistically significant intra-industry effects for rivals to private equity and hedge fund targets. The intra-industry effects for our private equity rival portfolio are inversely related to industry concentration, and positively related to a change in profitability, the market-to-book ratio and trading volume. Considering the rivals to hedge fund targets, we identify only the market-to-book ratio as an explanatory factor. While the the long-lasting return drift to hedge fund rivals is consistent with short-term results, we find that private equity rivals suffer statistically significant losses after the announcement, which can be explained by the expected negative competitive effects.