The Impact of Hedge Fund Activism: Evidence and Implications

John C. Coffee Jr.

Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences

Darius Palia

Rutgers Business School; Center for Contract & Economic Organization

September 15, 2014

European Corporate Governance Institute (ECGI) - Law Working Paper No. 266/2014
Columbia Law and Economics Working Paper No. 489

Hedge fund activism has increased almost hyperbolically. Some view this optimistically as a means for bridging the separation of ownership and control; others are more pessimistic, seeing mainly wealth transfers from bondholders or speculative expectations of a takeover as fueling the spike. Equivalent division exists over the impact of this increased activism, with optimists seeing real gains that do not erode over time and improvements in operating performance, and pessimists predicting shortened investment horizons, increased leverage, and reduced investment in research and development.

Our perspective is analytic. We begin by surveying the regulatory and institutional developments that have reduced the costs and increased the expected payoff from activism for hedge funds. Here, we focus particularly on the formation of “wolf packs” — namely, loose knit associations of hedge funds that are formed prior to, or contemporaneously with, the filing of a Schedule 13D. We then look at other new institutional structures that are appearing, as typified by the alliance between Pershing Square Capital Management and Valeant Pharmaceuticals in their bid for Allergan.

Then, we survey the empirical evidence on the impact of activism, looking successively at (1) who are the targets of activism?; (2) does hedge fund activism create real value?; (3) what are the sources of gains from activism?; and (4) do the targets of activism experience post-intervention changes in real variables? Although confident claims have been made by some researchers, we find the evidence decidedly mixed on most questions (other than the short term stock price impact). In particular, we find the conclusions about improvements in target operating performance that have been expressed by some to be overextended beyond their actual data and premature.

Finally, we examine the policy levers that could encourage or chill hedge fund activism and consider the feasibility of reforms. The gains from hedge fund activism may be high both because such activity is relatively low risk (if asymmetric information can be exploited that is acquired before the filing of a Schedule 13D) and short-term (with the median hedge fund activist holding for approximately nine months). Still, we predict that the impact of most regulatory changes are likely to be marginal. Conversely, we believe that private ordering (through techniques such as a “window-closing” poison pill) could achieve at least as much as regulatory changes.

Number of Pages in PDF File: 89

Keywords: hedge fund, institutional investor, Schedule 13D, shareholder activism, Williams Act, wolf pack

JEL Classification: G23, G28, G32, G34, G35, K22

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Date posted: September 17, 2014 ; Last revised: October 4, 2014

Suggested Citation

Coffee, John C. and Palia, Darius, The Impact of Hedge Fund Activism: Evidence and Implications (September 15, 2014). European Corporate Governance Institute (ECGI) - Law Working Paper No. 266/2014; Columbia Law and Economics Working Paper No. 489. Available at SSRN: https://ssrn.com/abstract=2496518 or http://dx.doi.org/10.2139/ssrn.2496518

Contact Information

John C. Coffee Jr. (Contact Author)
Columbia Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212-854-2833 (Phone)
212-854-7946 (Fax)

European Corporate Governance Institute (ECGI)
B-1050 Brussels
American Academy of Arts & Sciences
136 Irving Street
Cambridge, MA 02138
United States
Darius Palia
Rutgers Business School ( email )
111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)
Center for Contract & Economic Organization ( email )
435 W 116th St.
New York, NY 10027
United States

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