One Asset Spoils (Selling) the Bunch? The Use of Corporate Divestitures by Hedge Funds and Shareholder Activists

Abstract

We study corporate divestitures used by activists as means to an end, and examine their short-term and long-term outcomes. Using hand-collected data on activist-initiated divestitures, we show that hedge funds do not use divestitures to attract bidders, nor do they liquidate their holdings faster than other activists. Rather, divestitures initiated by hedge funds improve long-term target firm profitability, even relative to other activists. We show that hedge fund activists use derivatives to accumulate voting rights without having to disclose—a strategy that is not available (or is much more costly) to other activists—when they identify value-creating opportunities through divestitures.

Keywords: Shareholder Activism; Intervention Outcome; Hedge Funds; Divestitures; Spinoffs; Takeovers

JEL Classification: G23; G34