Hostile Resistance to Hedge Fund Activism

Abstract

When facing hedge fund activists, target firms often fight back. Targets with agency problems and those confronting the threat of investor coordination frequently engage in hostile resistance by implementing governance changes associated with managerial entrenchment. The market negatively responds to hostile resistance, and unless hedge funds counter-resist, these campaigns have worse operating performance, faster activist exit, and fewer mergers than do campaigns without hostile target resistance. By contrast, when hedge funds counter-resist with proxy fights, lawsuits, or unsolicited tender offers, the impact of hostile target resistance is reversed, and these campaigns have similar outcomes to campaigns without hostile target resistance.

Keywords: hedge fund activism, target firm resistance

JEL Classification: G23, G30, G34