This study investigates the causal impact of hedge fund activism (HFA) on market liquidity. The empirical results show that HFA leads to a deterioration in stock liquidity, with the effect being more pronounced in firms characterized by greater information asymmetry and financial constraints. The decline in liquidity is also more evident in cases of high-intensity campaigns, led by funds with weaker market reputation, and that engage more frequently in activist interventions. Additional analyses reveal that price efficiency, corporate information flow, and operating complexity contribute to liquidity decline. This evidence holds using several liquidity metrics and sensitivity tests, and we rule out any potential endogeneity concern using an exogenous setting in our Difference-in-Differences regression analysis. Overall, this study underscores the disruptive influence of HFA on corporate dynamics and its wider market repercussions.

Subject. This article examines the activities of hedge funds, analyzes their strategies, and the use of derivative financial instruments for hedging risks and maximizing profits. Objectives. The article aims to analyze and structure data on hedge funds from open sources and scientific research, assess the impact of hedge funds on the stock market, and evaluate the development prospects of the Russian hedge fund market. Methods. For the study, I used the method of analysis. Results. Based on the analysis of scientific articles and research regarding hedge fund activities and the assessment of their strategies, the article finds that the use of derivative financial instruments in hedge fund strategies is effective. The article also describes the prospects of the Russian market for interval mutual investment funds. Conclusions and Relevance. Hedge funds use a wide range of strategies and financial instruments and often deliver better results compared to the market. However, not all funds are aimed at hedging risk, so the investor must choose the fund carefully. The results obtained can be used by private and corporate investors to familiarize themselves with the complex structure of hedge funds, as well as in public administration, since regulation of the hedge fund market is necessary.

We construct a novel hand-collected large dataset of 205 U.S. hedge funds and 1025 activist events over the period 2005–2013, which records both the Schedule 13D filing date and the voice date, and explore the role of voice in value creation. We employ alternative inferential statistical approaches, including parametric, non-parametric, and heteroscedasticity-robust tests. We reveal that the voice date is important in creating short-term firm value and provide strong evidence that voice is associated with positive abnormal returns. These findings suggest that voice leads to information revelation, with implications for U.S. stock market arbitrage.

Using director-specific, within-firm variation in poison pills, we find that pill-adopting nonexecutive directors experience a decrease in shareholder votes, an increase in termination rates across all their directorships, and a decrease in the likelihood of new board appointments. These consequences are not because of poor firm performance, active bid resistance, or hedge fund activism, and accrue especially when the adopted pill is relatively costly to the firm. Firms have positive stock price reactions when pill-associated directors die unexpectedly, compared with negative returns for other directors. We conclude that pill-adopting directors experience a decrease in the value of their services. This paper was accepted by Camelia Kuhnen, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03558 .

Hedge fund activism and loan loss provisioning in U.S. banks

Does hedge fund activism harm corporate social performance? Evidence from ESG ratings

ABSTRACT We provide evidence that activist hedge funds significantly influence target firms’ debt choices. After hedge fund activism (HFA), the proportion of long‐term debt significantly increases in target firms. This debt maturity increase is correlated to post‐HFA governance reforms. Post HFA, target firms issue more bonds than loans; such preference for bonds explains the increase in targets’ debt maturity. Our findings indicate that target firms substitute their short‐term creditor‐driven governance with a governance mechanism influenced by activist hedge funds.

Does familiarity breed activism? Geography and hedge fund activism

Betting on my enemy: Insider trading ahead of hedge fund 13D filings

The purpose of this paper is to evaluate the relationship between regulatory magnitude and hedge fund market stability, transparency, and general performance across jurisdictions. The methodology used is a systematic literature review using keywords like “hedge fund regulation” and “systematic risk” with only papers from 2018-2024 and from specific Meta databases. The literature review discusses how the presence of robust regulatory oversight reduces the likelihood of systemic risks associated with hedge fund activities. This is coupled with how stricter regulatory frameworks lead to improved transparency and how increased reporting requirements for hedge funds can positively impact market stability. Major findings include successful regulatory efficacy with acts like the Dodd-Frank Act, mixed market impacts, and significant innovation trade-offs. This paper involves a comparison between legislation affecting hedge funds in America and hedge funds in India alongside the impact it has on their performance and results. This paper also involves case studies of hedge funds contributing to legislation directly and indirectly through mechanisms of influence like lobbying and self-regulation. The implications for policymakers are notable, as they must balance transparency mandates with proportionality to avoid stifling smaller funds. Additionally, a major trade-off that regulators must solve is between investor protection and hedge fund growth and performance, as previous regulation has shown consistent increases in compliance costs. To end with, the paper also includes policy recommendations like increased reporting requirements and global coordination in order to combat the existing problems in the hedge fund industry with evaluation and consideration of phenomena like regulatory capture.

This study explores the influence of institutional investor coordination on analyst recommendations in the context of hedge fund activism. We find that analysts are more likely to upgrade and less likely to downgrade their recommendations for firms with growing institutional ownership, while institutional coverage primarily influences upgrade predictions. The effect is more pronounced when activists have a track record of acquiring firms with institutional investor backing. Our analysis also shows that during crisis, analysts emphasize collective institutional actions, whereas in normal periods, they focus on ownership levels. These findings suggest that institutional coordination reduces analyst uncertainty and positively shapes their opinions during activist campaigns.

Abstract This study uses valuation allowances (VAs) for deferred tax assets to examine whether hedge fund activists (HFAs) use and affect financial reporting of income taxes. Specifically, we investigate whether HFAs target firms with VAs and whether target firms are more likely to release VAs post‐intervention. We find that the existence, magnitude, and increases in VAs increase the marginal probability that HFAs will target a firm by between 12% and 24%. We also find that target firms are 4.6% more likely to release VAs following the intervention, and this effect persists for up to 2 years. Releases of VAs appear to stem from implemented tax avoidance strategies and changes in financial reporting of income taxes rather than real changes in operating performance or earnings management. Overall, HFAs appear to understand the interplay between tax planning and financial reporting of income taxes and use both to unlock value in target firms.

Abstract Hedge fund activism has become a prominent organizational phenomenon that attracts increasing scholarly interest. To advance our understanding of the spillover effect of this phenomenon, this study develops a theory on the industry‐wide spillover effects of hedge fund activism on non‐targeted firms’ focus on exploration vis‐à‐vis exploitation in technological innovation activities. In the empirical context of US‐listed chemical firms from 2000 to 2015, we find that non‐targeted firms exhibit a lower level of exploration relative to exploitation following hedge fund activism against their industry peers. Moreover, the industry spillover effect of hedge fund activism increases with the target firm's media coverage and decreases with the focal non‐targeted firm's financial performance. These results support our theory and highlight the potential dark side of hedge fund activism on exploratory innovations in firms even if they are not directly targeted.

Hedge Fund Activism and Value Creation in Family Firms

Hedge fund activism has become an integral part of publicly traded firms, and our paper adopts a behavioral lens to examine how the hostility of tactics employed by activist hedge funds may influence the response of target firms. Drawing on cognitive mechanisms and insights from interviews with investment professionals, we propose that activists’ use of hostile tactics may paradoxically trigger greater resistance from target firms. Specifically, we argue that management and the board may seek greater desire for control, and experience ego threat and heightened anxiety in the face of hostility, which increases target firm resistance. Using a sample of 731 activist hedge fund campaigns from 2002 to 2015, we find that target firms are more likely to resist when the activist hedge fund uses more hostile tactics. Further, our findings indicate that resistance towards hostile tactics increases when activist demands challenge the position of management or the board, but is mitigated by a firm’s prior activism experience or boards with more directors that have experienced hostile campaigns.

This comprehensive study explores hedge fund activism (HFA), its impact on corporate governance, and shareholder value. It outlines the operational mechanisms of HFA, including target selection, share acquisition, influence exertion, and pushing for change. The study also delves into HFA's aggressive investment strategies, contrasting them with traditional funds. It examines HFA's positive impacts, such as improved corporate governance and shareholder value, and negative consequences, like short-termism and increased market volatility. The paper further analyzes HFA through an ESG lens, highlighting its potential to disrupt CSR practices and affect employee health. Case studies of Yahoo and J.C. Penney illustrate both the successes and failures of HFA. The study concludes by suggesting areas for future research and action, emphasizing the need for a balanced approach to harness HFA's benefits while mitigating its risks.

The racial disparity in mortgage approval rates decreases by four percentage points as a result of hedge fund activism targeting banks. Target banks experience a higher turnover of mortgage officers and open new bank branches in areas with greater racial disparities in mortgage approval rates. We show that the results are driven by hedge fund activists’ efforts to increase profitability and comply with the community reinvestment act. Our results suggest that hedge funds’ incentives to maximize shareholder value do not necessarily lead to a negative impact on other stakeholders. This paper was accepted by Victoria Ivashina, finance. Funding: This work is financially supported by the Key Program of National Natural Science Foundation of China [NSFC Grant Number 72233003] and the General Program of National Natural Science Foundation of China [NSFC Grant Number 72372517]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.03452 .

PurposeThis study examines how corporate litigation, both securities-related and not, is affected by hedge fund (HF) activism.Design/methodology/approachWe use a difference-in-differences (DiD) method, along with propensity score matching and firm fixed effects and a comparison of HF and non-HF activists for identification.FindingsWe find that companies that are targeted by HFs face operation-related lawsuits, mainly from stakeholders or competitors. This effect does not seem to be caused by targets' higher tendency to settle the cases. Our evidence shows that HF activists increase firm value for the target firms that are prone to litigation.Originality/valueTherefore, our evidence supports the idea that the higher operation litigation risks are unintended consequences of improving firm efficiency through cost savings or restructuring of target firms by the activists.

Subject. The article discusses a model for unification of trading strategies architecture based on segregated software interfaces, which will improve the quality of testing of research works aimed at the development of quantitative trading strategies. Objectives. The purpose of the study is to formulate proposals for unification of the architecture of trading strategies for automatic trading systems based on the interface segregation principle. Methods. The study employs the method of empirical observation, analysis of analytical and expert information, practices of software engineering in systems design, in particular, SOLID design principles. Results. The study formed, developed and presented for discussion the protocols of trading strategies to achieve unification in the development of trading strategies used in automatic trading systems. The results of the work are published in the open repository and distributed under the MIT license. Conclusions. The development and application of a single and open repository of segregated interfaces for interaction with trading strategies will enable to qualitatively and quickly test new quantitative models. The findings can be integrated into the activities of hedge funds using quantitative strategies for capital management.

In search of a unicorn: Dynamic agency with endogenous investment opportunities