Corporate Governance and Hedge Fund Activism
288 Pages Posted: 19 Aug 2015 Last revised: 26 Jun 2016
Date Written: September 2015
Over the past two decades, hedge fund activism has emerged as a new mechanism of corporate governance that brings about operational, financial and governance reforms to a corporation. Many prominent business executives and legal scholars are convinced that the entire American economy will suffer unless hedge fund activism with its perceived short-termism agenda is significantly restricted. Shareholder activists and their proponents claim they function as a disciplinary mechanism to monitor management and are instrumental in mitigating the agency conflict between managers and shareholders. I find statistically meaningful empirical evidence to reject the anecdotal conventional wisdom that hedge fund activism is detrimental to the long term interests of companies and their long term shareholders. Moreover, my findings suggest that hedge funds generate substantial long term value for target firms and its long term shareholders when they function as a shareholder advocate to monitor management through active board engagement to reduce agency cost.
Keywords: Corporate governance, shareholder activism, hedge fund activism, proxy fights, short-termism, market efficiency, long-term value, shareholder rights, hedge funds, agency cost
JEL Classification: D21, D22, D81, D82, G12, G23, G32, G34, G35, G38, K22
Suggested Citation: Suggested Citation