Hedge Fund Activism, Firm Valuation and Stock Returns

Abstract

This paper studies the association between hedge fund activism and firm value, using matching procedures to incorporate the nonrandom selection of firms targeted by activist hedge funds. We find that targeted firms improve less in value (Q) subsequent to activism starts than ex-ante similarly poorly performing control firms that are not subject to activist campaigns. Further, long-term abnormal stock returns of both target and control firms are similarly positive and significant. However, activist hedge funds have strong stock selection skills as well as strong trading skills that allow them to outperform.

Keywords: Hedge fund activism, corporate governance, long-term firm value, selection effect, matched sample, limited commitment, stakeholder relationships

JEL Classification: G12, G23, G34