In for the Long Haul: Activist Hedge Funds and Fragility Risk
54 Pages Posted: 4 Jun 2016 Last revised: 5 Jun 2017
Date Written: May 19, 2017
This paper explores the idea that investors ex ante price the risk that large fire sales by liquidity-shocked blockholders will trigger negative price impacts, referred to as "fragility risk", and argues that fragility risk should be lower for institutional blockholders who can credibly signal superior long-term liquidity management. This mitigation of risk can subsequently generate substantial abnormal returns. Especially considered are block acquisitions by activist hedge funds, who are unique in terms of long lock-up and redemption notification periods. A hand-collected dataset reveals comparatively higher cumulative abnormal returns following activist hedge fund block acquisitions. A difference-in-differences analysis shows that block ownership by activist hedge funds insulates stocks against a drop in returns following a positive shock to fragility risk.
Keywords: Institutional Investors, Blockholders, Hedge Funds, Hedge Fund Activism, Liquidity
JEL Classification: G11, G12, G14, G23, G32
Suggested Citation: Suggested Citation