Shareholder activism by hedge funds in a concentrated ownership environment: an empirical study for Germany

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.

Antecedents of hedge fund activism in French listed target firms

Inspired by research on social movements, we extend the idea that activists look for opportunities to target firms to the realm of financially motivated shareholder activists. Focusing on activist hedge funds, we argue that hedge fund campaigns are more likely to succeed when boards are slow and less united and that, compared with more homogeneous boards, demographically diverse boards tend to act more slowly and with less unity. Although these attributes make demographically diverse boards more effective under “normal” circumstances, they become a liability in confrontations with activist hedge funds. We, therefore, hypothesize that when subject to governance and performance problems, firms become more likely targets of activist hedge funds when they also have demographically diverse boards. To further probe our theory, we explore the opportunity recognition of activist hedge funds in two ways. First, we posit that this opportunity will be recognized and exploited primarily by experienced activist hedge funds. Second, we argue that activist hedge funds’ opportunity recognition is correct in so far that demographically diverse boards respond to activism campaigns in ways that are likely to benefit activist hedge funds. Using data on United States-based activism campaigns, we find support for our theory. By simultaneously studying problems and opportunities, this study establishes a foundation for examining when the disciplinary effect of shareholder activism may go awry and reveals why a strict business case for demographic diversity may be insufficient to align all shareholders behind board diversity. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2023.1679 .

Gone Global: The International Diffusion of Hedge Fund Activism Outside the United States

Hedge Fund Activism and Financial Performance

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.

Research summary : Prior research suggests that hedge fund activism can benefit targeted firms. We explore a potential negative side‐effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that firms targeted by hedge fund activists experience a greater departure of valuable employees compared with a matched sample of non‐targeted firms. Further, the positive effect of hedge fund activism on firm performance is stronger when firms experience a lower departure of valuable employees. These results suggest that hedge fund activism can lead to the unwanted loss of human capital, which may reduce the otherwise positive performance effect on targeted firms. These findings contribute to research on investor activism and human capital. Managerial summary : Hedge fund activism has been shown to benefit shareholders of targeted firms. We investigate a potential negative side‐effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that targeted firms experience a greater departure of valuable employees when attacked by hedge fund activists, and that the positive performance effect of hedge fund activism is greater if that departure is smaller. Our results, together with additional analyses, are consistent with our argument that valuable employees decide to leave firms targeted by hedge fund activists to reduce the potential uncertainty and adversity for their careers, and that this human capital loss can harm firm performance. Our study has important implications for firms facing the potential prospect of hedge fund activism.

Research Summary This article examines the antecedents and outcomes of hedge fund activism in family versus nonfamily firms. We find that activist hedge funds are less likely to initiate campaigns against family firms than nonfamily firms, but the cumulative abnormal returns to announcements of campaigns against family firms exceed those of nonfamily firms. The presence of one or more family members on a firm's board of directors appears to be a key impediment to hedge fund activism in family firms. Additionally, activist hedge funds are more likely to use hostile tactics and demand more substantive changes in their campaigns against family firms than nonfamily firms. Together, these findings contribute to the agency theory‐based literatures on hedge fund activism, family firms, boards of directors, and corporate governance. Managerial Summary Activist hedge funds are a significant force in corporate governance, driving the companies they target to change their strategies, structures, and leadership. Family firms are prevalent and economically important, accounting for a third to a half of companies worldwide. This article compares hedge fund activism in family versus nonfamily firms. Activist hedge funds are about 41% less likely to initiate campaigns against family than nonfamily firms, but the average returns to successful activist hedge fund campaigns against family firms are about 2% higher than in nonfamily firms. These effects are especially pronounced when family members serve on a company's board of directors. Furthermore, activist hedge funds are more likely to use hostile tactics and demand more substantive changes in campaigns against family than nonfamily firms.

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

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

A Theory of Shareholder Activism and its Place in Corporate Law

After decades of being primarily a US-based phenomenon, the globalization of hedge fund (HF) activism is increasing at an unprecedented speed. This chapter reviews the empirical research on HF activism by systematically comparing studies conducted in the US and outside the US context. The nascent body of work on HF activism is categorized and discussed within four research sub-streams: the antecedents of HF activism; HF activists’ tactics; the responses of target firms to HF activist campaigns, and the outcomes of the latter for HF activists, target firms, and other stakeholders. Six select cases of interventions by a prominent HF activist illustrate the cross-country differences in hedge fund activist practices outlined in the literature review. The chapter concludes by outlining current research gaps and formulating research questions that could advance our knowledge on hedge fund activism in a global context.

Hedge fund activism is on the rise in Europe. Whereas hedge funds activism has been so far largely a U.S. phenomenon, there is survey evidence suggesting that hedge funds are looking for new targets. Europe is particularly attractive in this respect because the European jurisdictions support broader rights than those available to the shareholders of a typical Delaware-incorporated U.S. public company. Shareholder rights are an important part of the activist hedge fund's toolbox, although they must be understood in light of the activist's business model. This chapter discusses hedge fund activism as a major driver of institutional shareholders' engagement, particularly in Europe. It argues that the revision of the Shareholder Rights Directive (SRD) curbs rather than supports hedge funds activism, therefore casting some doubts as to whether the SRD will effectively foster engagement and investment by institutional shareholders.

Corporate Governance and Hedge Fund Activism

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