The Oxford Handbook of Hedge Funds by Douglas Cumming;Sofia Johan;Geoffrey Wood;

Author:Douglas Cumming;Sofia Johan;Geoffrey Wood;
Language: eng
Format: epub
Publisher: OUP Premium
Published: 2021-06-15T00:00:00+00:00

11.6 CONCLUSION

Over the last two decades hedge funds have evolved into a vocal group of shareholders, taking up a central position in corporate governance. Due to a more confrontational style against the management of target firms, hedge fund activism has created a lot of attention with proponents and opponents alike. Most academic research actually finds that hedge fund activism is, on average, associated with stock price appreciations, profitability improvements, increasing control over management, and changes related to corporate control. This chapter briefly summarizes the evidence documented in the literature. Using a large sample of all US listed companies, we manage to replicate most of the existing evidence. The main focus of the chapter is, however, to compare hedge fund activism to the activism by other types of investors as prior studies on institutional investors considered activism to be less effective.

Following the approach taken in the hedge fund literature, which defines activist events as block accumulations by activist investors instead of submissions of shareholder proposals, we find more promising results for all types of investors. The unifying feature in our sample is that shareholders have significant stakes invested and that they indicate intentions to influence the management. This suggests that they are well incentivized and willing to develop an agenda for the target firm. As most interventions by activist investors take place behind the scenes, this definition is more likely to capture value-enhancing activism. Our results suggest that there are abnormal stock returns of comparable magnitude for all types of activist investors around the time they accumulate a 5% equity block. Looking at profitability improvements and leverage increases subsequent to activism, we again find strong effects for all types of activist investors. Further disentangling which of the effects are related to the targeting decision and which ones are truly causal continues to be an important research agenda for the future.

Despite the similarities, we also document more unique aspects of hedge fund activism. Most importantly, hedge funds are by far the most frequent type of investor willing to actively oppose management. This is reflected in the large number of 13D filings, but also in the high percentage of proxy contests and takeovers with hedge fund involvement. In addition, hedge funds are more likely to engage with larger firms, which is important because large firms are less likely to be the target of a 13D shareholder, proxy contest, or takeover. Only shareholder proposals, which are relatively ineffective, are more likely in large firms. Finally, in comparison to other activist investors, hedge funds as well as banks pressure management more aggressively to increase payout policies in case the firms hold excess cash.

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