The Power of Reputation: Hedge Fund Activists

Abstract

This paper considers how characteristics of target firms and hedge funds, along with shareholder activists' reputation, influence target firms' valuation and performance. I extend prior work that shows positive market reaction for the target firm around the initial Schedule 13D filing date by studying the broad cross-sectional variation of returns to shareholder activism. I find that firms' and funds' characteristics are correlated with the announcement premium and that the market rewards hedge fund reputations of success, but not aggression. My results indicate the market weights recent events relative to those of the distant past, suggesting reputation fades away with time.

Keywords: Hedge Fund, Reputation, Corporate Governance