Hedge Fund Activists: Value Creators or Good Stock Pickers?

Abstract

This paper considers two competing hypotheses for the positive abnormal stock returns of firms targeted by activist hedge funds in both the short term and the long term: are they value creators or good stock pickers? Using matching to mitigate selection effects, we find that activists’ targets do not outperform ex ante similar control firms; this suggests that activists are good stock pickers, not value creators. We also observe abnormal returns around filings disclosing material changes in activist ownership. This too supports good stock picking as the more plausible hypothesis. Overall, our evidence indicates that hedge fund activism does not seem to benefit the buy-and-hold shareholders of targeted firms.

Keywords: hedge funds, stock pickers, timing skills

JEL Classification: G00, G10, G11, G34