50 Pages Posted: 18 Mar 2010
Date Written: February 23, 2010
Using a sample of 272 hedge fund activist events from 1994 to 2008, we find that targets of intense hedge fund activism (57 events) show strong improvements in operating performance for up to three years following activism, while the remaining targets (215 events) do not. Activist events are classified as “intense” if the hedge fund obtains all or a portion of its target firm stake in a venue other than the open market and one of the following conditions holds: either the hedge fund’s filing with the SEC states a specific purpose of activism or the hedge fund obtains more than one type of security in the target firm. Notably, intense hedge fund activists choose targets most likely to benefit from intervention: they have worse operating performance, larger cash positions, lower sales, smaller size, and higher expenses in the year prior to being targeted than either a matched sample of firms not targeted by hedge funds or targets of less intense activism. In the years following activism, improvements in operating performance are associated with reduced cash positions, growth in sales, and an increase in leverage. Targets of intense activism also have better short-term stock performance following the announcement of hedge fund involvement than either a matched sample or targets of less intense activism. Finally, an analysis of holding period returns indicates that all hedge fund activists, both intense and non-intense, benefit from improved target firm stock performance during the activism period, with somewhat weaker evidence that an investor attempting to mimic the portfolio of a hedge fund activist would also profit.
Keywords: Hedge funds, activism, target firms, corporate governance
JEL Classification: G23, G3
Suggested Citation: Suggested Citation