Abstract
This article aims to describe the contemporary objectives and tactics of activist hedge funds as well as the actions taken by the targeted companies as a result of their intervention. In this research, we explore the consequences of activism over time (impact on operational performance and share price returns) and compare these with a random sample of firms with similar characteristics at the time of intervention; we also analyse the singularities associated with salient sub-groups of targeted firms. The sample used for our research consists of all 259 firms targeted by activist hedge funds in 2010 and 2011. We found evidence that any improvements in operating performance (return on assets, return on equity, Tobin’s Q) result mainly from selling assets, cutting capital expenditures, buying back shares, reduce workforce and other basic financial manoeuvres. Although there is no evidence of deterioration over a 3-year period, the stock’s performance of targeted companies over a 3-year span barely matches the performance of a random sample of companies.We found that the best way for activists to make money for their funds is to get the company sold off or substantial assets spun off. If not sold, the hedge fund episode often results for the targeted firms in change of senior management and board members, stagnation of assets and R&D. This research does not provide any evidence of the superior strategic sagacity of hedge fund managers, but does point to their keen understanding of what moves stock prices in the short term.
Highlights
Shareholder activism comes in many shapes and hues (Nili, 2014)
The financially driven activism of hedge funds consists of targeting companies where it is expected that implementing measures from a menu of manoeuvres will likely boost their stock prices
Conclusions on actions taken As a broad generalization, which will be refined later on when we examine the results in relation with the stated objectives of hedge funds, the Targeted firms, as compared with a random sample, show a much higher rate of companies sold or merged, as well as a rate of CEO and CFO change that far exceeds what is observed in a random sample of comparable firms
Summary
Shareholder activism comes in many shapes and hues (Nili, 2014). There is the socially minded, issue-driven, form of activism (Rehbein et al, 2013, p. 137), the ‘soft’ activism of institutional investors and the ‘hard’, financially driven, activism practiced principally by hedge funds. Social activism usually takes the form of pressures on corporations to change their social agenda and cope with environmental, moral, religious or other non-business issues. The soft activism of institutional investors usually involves shareholder proposals aimed at ‘improving corporate governance’ (Thomas and Cotter, 2007). The activist first determines whether a company would likely ‘benefit’ from its intervention; if deemed so, the hedge fund takes an equity position and begins to agitate for changes (Kahan and Rock, 2007). This form of activism is the focus of this article
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
