Boardroom Battles: Do Activist Interventions from Hedge Funds Create Shareholder Value?

Abstract

Hedge fund activism is a rather new alternative investment vehicle, which has had a large and growing impact on investing and how public firms are managed by their way of holding firms more accountable to shareholders. Activism by large institutional shareholders has been a part of the U.S. landscape for over a decade, long enough to assess whether it affects firm performance. Hedge fund activist investing was once the province of corporate raiders but has developed into an accepted hedge fund strategy. By often acquiring an influential stake in public firms that are perceived undervalued upon intervention, hedge fund activists create their own facilitator for share appreciation. The activist mind-set is a hypersensitive focus on shareholder value creation. This paper addresses the creation of shareholder value by carrying out extensive investigation to measure the short- and long-term value effect of intervention from hedge fund activists on the shareholder value of target firms. In doing so, this paper applies the event study methodology. Next, in order to address possible value driving target firm-specific characteristics and investment objectives associated with intervention, this paper decomposes its analyses into greater detail, analyzes target firm financial statements in the following and conducts cross-sectional analyses to arrive at a more robust conclusion. In addition, this paper examines possible procyclical effects of shareholder activism by measuring the short- and long-term value effect of intervention from hedge fund activists during economic turmoil and prosperity. The results of this paper firstly reject the myopic claim of short-term value creation at the expense of longterm shareholder value from the positive abnormal returns generated by both the short- and long-term preliminary results. The analysis of systematic behavior in target firms in the investment decision making of hedge fund activists showed that there are clear patterns in terms of target firms key figures that hedge fund activists use in order to spot potential targets with room for improvement. Subsequently, the short-term return shows that shareholder value is created through all sample periods and that certain investment objectives are value drivers to a greater extent than others. The investment objectives decomposed into economic cycles shows a great deal of dispersion among the results. In the long-term, shareholder value is created through multiple estimation models, however, the results from the sample period and investment objective analyses indicate greater dispersion and less statistical significant results thus making the preliminary rejection of the myopic claim less robust. Overcoming the less robustness, the analysis of target firm characteristics in the years following intervention and the cross-sectional analyses provide results that mitigate some of the uncertainty surrounding this claim by providing further evidence in rejecting it. This paper contributes to the field by including a prolonged period containing two periods of turmoil and three periods of prosperity and additionally by carrying out a more comprehensive study of hedge fund activism. One way this paper differentiates itself is by its great level of scrutiny in the examination of investment objectives.