The New Shareholder Activism

Abstract

In this paper, we begin by documenting the successes and failures of institutional shareholder activism in recent years in section I. We find that overall institutional activism has been of marginal importance at targeted firms. We then move on in section II to contrast institutional investor activism with the much more aggressive recent activism of the hedge fund managers. This discussion leads us to define the costs and benefits of hedge fund activism for each of the four major broad types of strategies that these funds have pursued: information asymmetry and convergence trades; capital structure motivated trades; merger and risk arbitrage; and most controversially, governance and strategy. This analysis shows that while there are benefits derived from hedge fund activism there are clear costs as well. Governance and strategy activism emerges as the most important force affecting corporate governance. We assemble some empirical evidence about the extent of this activism, including a list of the most active hedge funds with the number of significant equity positions they took in 2005. Additionally, for the period 1999 to 2005, we document the enormous upswing in hedge fund 13D filings in target companies revealing positions in excess of five percent. By examining a sample of these filings, we find that they overwhelmingly state that the hedge fund's purpose is to engage in activist behavior. While much more analysis remains to be done, the evidence we present in this paper points to the importance of hedge fund activism as a new force that is causing rapid corporate governance changes.