Accounting Responses to Hedge-Fund Activism

31 Pages Posted: 20 Aug 2011 Last revised: 31 Jul 2012

See all articles by Curtis M. Hall

Curtis M. Hall

Drexel University - Bennett S. LeBow College of Business

Mark A. Trombley

University of Arizona - Eller College of Management

Date Written: July 27, 2012

Abstract

We examine changes in firms’ discretionary accounting accruals around the commencement of activism by hedge funds. We argue that hedge funds have the potential to provide increased monitoring of earnings management behavior and we predict and find empirically that average discretionary accruals decrease around the commencement of hedge fund activism. We find in both univariate and multivariate tests that discretionary accruals decline significantly after commencement of hedge fund activism, suggesting activist hedge funds do provide at least some incremental monitoring of accounting and reporting in addition to their focus on the governance, operations and financing of target firms. However, we find no cross-sectional relationship between changes in earnings management and analyst following, institutional ownership or other factors, suggesting that the accounting improvements are not conditional on these factors but are instead a general benefit resulting from the intervention of activist hedge funds.

Keywords: Hedge Funds, Activism, Earnings Management, Discretionary Accruals

JEL Classification: M41, M43, G34, J33, K22

Suggested Citation

Hall, Curtis M. and Trombley, Mark A., Accounting Responses to Hedge-Fund Activism (July 27, 2012). Available at SSRN: https://ssrn.com/abstract=1912279 or http://dx.doi.org/10.2139/ssrn.1912279

Curtis M. Hall

Drexel University - Bennett S. LeBow College of Business ( email )

Philadelphia, PA 19104
United States

Mark A. Trombley (Contact Author)

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-4805 (Phone)
520-621-3742 (Fax)

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