Governance under the Gun: Spillover Effects of Hedge Fund Activism

67 Pages Posted: 19 Nov 2013 Last revised: 10 Aug 2016

Nickolay Gantchev

University of North Carolina Kenan-Flagler Business School

Oleg Gredil

Tulane University -- A.B. Freeman School of Business

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: August 6, 2016

Abstract

Hedge fund activism is an important monitoring mechanism associated with substantial improvements in the governance and performance of targets. In this paper, we investigate whether the managers of peer firms view activism in their industry as a threat, and undertake real policy changes to mitigate that threat. We find that they do – industry peers with fundamentals similar to those of previous targets reduce agency costs and improve operating performance along the same dimensions as the targets. These effects are distinct from those of product market competition or time-varying industry conditions, and are anticipated by the market as evidenced by increased valuations. Finally, we show that these policy and valuation improvements lower the peers’ ex-post probability of being targeted, suggesting that this “do-it-yourself” activism is indeed effective. Taken together, our results imply that shareholder activism, as an external governance device, reaches beyond the target firms.

Keywords: Shareholder activism, Corporate governance, Hedge funds, Institutional investors

JEL Classification: G12, G23, G32, G34

Suggested Citation

Gantchev, Nickolay and Gredil, Oleg and Jotikasthira, Chotibhak, Governance under the Gun: Spillover Effects of Hedge Fund Activism (August 6, 2016). Available at SSRN: https://ssrn.com/abstract=2356544 or http://dx.doi.org/10.2139/ssrn.2356544

Nickolay Gantchev (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-4926 (Phone)
919-962-2068 (Fax)

HOME PAGE: http://sites.google.com/site/nickolaygantchev/

Oleg Gredil

Tulane University -- A.B. Freeman School of Business ( email )

7 McAlister Dr
New Orleans, LA 70118
United States

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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