Hedge Fund Activism Research Articles

Hedge Fund Activism on Dual Edges: A Comprehensive Study

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 Color of Hedge Fund Activism

The Color of Hedge Fund Activism

Hedge fund activism and corporate litigation: an analysis of securities and non-securities lawsuits

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.

The Impact of CEOs’ Social Evaluations on Hedge Fund Activism

The Impact of CEOs’ Social Evaluations on Hedge Fund Activism

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

We study the optimal dynamic contract that provides incentives for an agent (e.g., SPAC sponsor, VC general partner, CTO) to exploit investment opportunities/targets that arrive randomly over time via a costly search process. The agent is privy to the arrival as well as to the quality of the target and can take advantage of this for rent extraction during the search process and the ensuing production. The optimal contract provides the agent with incentives for timely and truthful reporting via a time-varying threshold for investment and an internal charge for the time spent on search. In the equilibrium, as time elapses, the charge becomes progressively higher while the investment threshold is progressively lower, resulting in overinvestment at a time-varying degree. Our model generates empirically testable predictions regarding investments (such as M&As, hedge fund activism, VC investing, SPACs, and internal innovations), linking the degree of overinvestment to observable firm and industry characteristics.

Hedge fund activism, R&D efficiency and firm value

We investigate the effectiveness of hedge fund activism in addressing inefficient R&D investment and creating long-term value at target firms. Using an endogenous growth model to estimate efficient R&D investment levels, we find target firms exhibit a tendency to overinvest in R&D. The likelihood of being targeted and activism announcement returns increase with R&D overinvestment. Despite observable cuts in R&D expenditure following activism, our analysis shows no significant improvement in R&D efficiency over the subsequent three years. Additional tests, controlling for the activist’s objectives, reputation, and stock selection ability, reveal a negative impact of activism on value creation. Our study offers important insights into how hedge fund activism shapes corporate R&D strategies and highlights challenges in achieving sustainable innovation and value enhancement through activist interventions.

The Effectiveness of Verbal Mimicry in Activist Hedge Fund Campaigns

Hedge fund activism frequently has severe consequences for target firms and their management and boards. Yet, we know little about target management and boards’ response to activist attacks. To advance our understanding in this respect, we examine how the style of target management and boards’ written communication with activists influences campaign outcomes. Building on the behavioral mimicry perspective, we propose that language style matching (LSM) and emotional tone mimicry (ETM), which constitute two distinct types of verbal mimicry, are important communication style characteristics of target management and boards’ response letters that can induce activist demand withdrawal. Though LSM and ETM are reflective of different modes of conflict behavior, we further reason based on conflict management research that ETM in conjunction with LSM is particularly effective in inducing activist demand withdrawal. The positive effects of ETM in conjunction with LSM, however, are expected to fade with increasing length of target management and boards’ written response. Results of an empirical analysis of the public communication between activists and target management and boards in 150 U.S. activist hedge fund campaigns between 2002 and 2019 support these predictions. Our study extends research on financial activism by offering a novel theoretical explanation as to why and how target management and boards can avert activist demands. Further, we contribute to behavioral mimicry research by examining the individual and joint effectiveness of distinct types of verbal mimicry in the hostile context of activist hedge fund campaigns.

The battle between activist hedge funds and labor unions

Activist hedge funds are more likely to target unionized firms. When they do, the short-term stock performance is higher, especially when the hedge funds’ targeting strategy is hostile. Employees and labor organizations at target firms tend to oppose activist hedge funds. Firms are more likely to unionize after being targeted by hedge funds, and employee satisfaction deteriorates at target firms. Moreover, unionized firms are more likely to strike after being targeted, and those strikes in opposition to hedge fund intervention are more severe and more detrimental to the firms. This paper further explores potential costs and harmful consequences to the firm value due to the tension between activist hedge funds and labor unions. After being targeted, unionized firms tend to have lower profitability, weakened corporate governance, exposure to a higher degree of competitive and product market threats, and a higher crash risk in stock prices.

Do large registered investment funds undermine shareholder activism? Evidence from hedge fund proposals

We examine the voting behavior of Registered Investment Funds (Mutual Funds, ETFs and Close-end Funds) on Hedge Funds proposals, a common vehicle of value-driven shareholder activism. We compare the support rates of Registered Funds versus other voting shareholders on different types of proposals set up for voting at shareholders meetings and explore fund-level characteristics that may explain the variation in support rates. Our results show that Registered Funds support rates on Hedge Fund proposals vary depending on the proposal category. In general, the support rates of Registered Funds are about 4 percentage points lower compared to other investors. However, that difference rises to 10 p.p. for proposals that are more confrontational to the incumbent management of the target company. Interestingly, the average lower support rates of Registered Funds are driven by the ten largest funds. On the contrary, Registered Funds from smaller parent groups tend to be more supportive of Hedge Fund activism. We document a 18 p.p. reduction in the probability of favorable votes on Hedge Fund proposals by the largest Registered Funds compared to smaller funds. Our results suggest that the growing ownership in public companies by large Registered Funds reduces the overall support of shareholder activism through Hedge Fund proposals.

Independence Reconceived

What makes a director independent? Scholars, regulators, and investors have grappled for decades with the fleeting notion of director independence. Originally conceived as guardians of shareholder interests that could safeguard a corporate board’s ability to check management’s power, independent directors have become a marquee feature of modern corporate governance. But do the corporate actions of directors that are considered “independent” under current standards comport with what we think independence requires? In many cases, the answer would seem to be “no.” From a lack of observable financial impact to the unabated flow of corporate scandals, independent directors seem to keep failing at the job they were championed to do.
 This Article addresses this puzzling tension, offering a novel theoretical and practical reframing of the decades-old discourse around independent directors. The historical focus on the classical managerial agency costs paradigm emphasized that directors who lack ties to the management team can prevent managerial slack or value extraction. However, this approach overlooks the critical role directors also have in curbing managerial overzealousness. In today’s governance ecosystem, directors are not only tasked with preventing managerial slack. They are increasingly tasked with preventing managerial overreach and misconduct even when such overreach or misconduct is compatible with promoting shareholder value. This has important theoretical and practical implications.
 This Article makes two key contributions to the literature. First, it reframes the question of what makes directors independent by supplementing the focus on agency costs as the driver for independence. By identifying a need to prevent boards from rubber-stamping managerial actions—even those taken in good faith—this Article suggests that a simple lack of ties to management fails as a litmus test for independence. Second, by reconceiving independence, this Article also provides tangible credence to the value of diversity on boards, the value and perils of hedge fund activism, and to the emerging discourse regarding ESG and stakeholderism.

Crude Oil Price Movements and Institutional Traders

We analyze the role of hedge fund, swap dealer, and arbitrageur activity in the crude oil market. The contribution of our work is to examine the role of institutional traders in switching between high-volatility and low-volatility regimes. Using confidential position data on institutional investors, we first analyze the linkages between trader positions and fundamentals. We find that these institutional position changes reflect fundamental economic factors. Subsequently, we adopt a Markov regime-switching model with time-varying probabilities and find that institutional position changes contribute incrementally to the probability of regime changes.

Hedge fund activism in family firms

AbstractResearch SummaryThis 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 SummaryActivist 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.

How activist investors value target firms: Evidence from hedge fund presentations

AbstractThis research study provides insights on how activist hedge funds perform valuation analyses of target firms. Relevant data was hand‐collected from a sample of activist hedge fund presentations. Based on the hedge funds’ valuation analyses, the undervaluation of the target firms amounts to approximately 30%, compared to the targets’ current share price. Besides, activist investors derive a value enhancement potential from their proposed strategies of approximately 70% to the targets’ current share price. These valuation results rely predominately on trading multiples. The dominant multiples are Enterprise value/EBITDA (EV/EBITDA) and Price/Earnings (P/E). Further, applied multiples are mainly forward‐looking, and the predicted performance measures are primarily consensus estimates. Besides, hedge funds sometimes adjust multiples arbitrarily to increase the comparability. Our results confirm that short‐term investors rely predominately on pricing analyses in their valuations.

Does hedge fund managers’ industry experience matter for hedge fund activism?

AbstractWe study whether fund managers’ industry experience is an important source of value creation in hedge fund activism. We find that the targets of industry‐expert fund managers realize higher activism announcement returns and better operating performance, particularly when fund managers’ industry expertise is more valuable for targets. These targets also engage in more focused acquisition and divestiture activities in industries where fund managers have experience, allocate more employees to these industries, and cut investments more in the postacquisition period. The superior performance of targets of industry‐expert fund managers is robust to controlling for the endogeneity concern and the attrition bias.

Hostile activism: Hostile tactics or hostile hedge funds?

AbstractIn this article, we examine reputation building by activist hedge funds and provide two new findings regarding hostile activism. First, we find evidence of a permanent reputation effect to hostile activism. Activist hedge funds that have engaged in hostile tactics receive on average a 3% higher cumulative abnormal return (CAR) [−10, +10] on their subsequent nonhostile campaigns compared to hedge funds that have not engaged in hostile tactics. This abnormal return is positively related to the level of the hostile reputation of the activist hedge fund. Second, we find that activist hedge funds with higher hostile reputations modify their nonhostile activism style to engage hostile‐like targets and pursue hostile‐like objectives but withhold the use of explicitly hostile tactics. These findings imply that (1) hedge funds can build a hostile reputation using their past engagement tactics and (2) market participants perceive and value such reputation as evidenced by the higher announcement return observed in subsequent targets.

Long-term Orientation and Hedge Fund Activism

Long-term Orientation and Hedge Fund Activism

Corporate Governance and Hedge Fund Activism

Corporate Governance and Hedge Fund Activism

Common Ownership and Hedge Fund Activism: An Unholy Alliance?

Common Ownership and Hedge Fund Activism: An Unholy Alliance?

Don’t Throw Me Under the Bus! Hedge Fund Activism and Corporate Workplace Safety Noncompliance

Don’t Throw Me Under the Bus! Hedge Fund Activism and Corporate Workplace Safety Noncompliance

The Color of Hedge Fund Activism

The Color of Hedge Fund Activism