The Real Effects of Hedge Fund Activism: Productivity, Risk, and Product Market Competition

53 Pages Posted: 10 Oct 2012 Last revised: 18 Jan 2013

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER

Hyunseob Kim

Cornell University - Samuel Curtis Johnson Graduate School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 1, 2012

Abstract

This paper studies the long-term effect of hedge fund activism on the productivity of target firms using plant-level information from the U.S. Census Bureau. A typical target firm improves its production efficiency within two years after activism, and this improvement is concentrated in industries with a high degree of product market competition. By following plants that were sold post-intervention, we also find that efficient capital redeployment is an important channel via which activists create value. Furthermore, our analyses demonstrate that measuring performance using the Compustat data is likely to lead to a downward bias because target firms experiencing greater improvement post-intervention are also more likely to disappear from the Compustat database. Finally, consistent with recent work in asset-pricing linking firm investment decisions and expected returns, we show how changes to target firms’ productivity are associated with a decline in systemic risk, particularly in competitive industries.

Keywords: Hedge funds, Governance, Productivity

JEL Classification: G12, G23, G34

Suggested Citation

Brav, Alon and Jiang, Wei and Kim, Hyunseob, The Real Effects of Hedge Fund Activism: Productivity, Risk, and Product Market Competition (July 1, 2012). US Census Bureau Center for Economic Studies Paper No. CES-WP-12-14; Johnson School Research Paper Series No. 33-2012. Available at SSRN: https://ssrn.com/abstract=2159877 or http://dx.doi.org/10.2139/ssrn.2159877

Alon Brav (Contact Author)

Duke University - Fuqua School of Business ( email )

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European Corporate Governance Institute (ECGI) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
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(212) 854-5553 (Phone)

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hyunseob Kim

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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