Download this Paper Open PDF in Browser

The Effects of Hedge Fund Interventions on Strategic Firm Behavior

Management Science, Forthcoming

Fox School of Business Research Paper No. 17-029

53 Pages Posted: 11 Aug 2017 Last revised: 18 Sep 2017

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Yinghua Li

Arizona State University (ASU) - School of Accountancy

Wei Wang

Temple University - Fox School of Business

Date Written: August 10, 2017

Abstract

We examine the impact of hedge fund interventions on target firms’ strategic behavior, specifically their voluntary disclosure and earnings management strategies. We find a decrease in both the likelihood and the frequency of management earnings forecasts conveying bad news and an increase in the level of real earnings management following interventions by hedge fund activists. Additional evidence suggests that managers substitute between voluntary disclosure and earnings management strategies in resisting hedge fund attacks. We also find that bad news withholding is more pronounced when hedge fund activists pose greater threats to the target firm’s management and when the intervention lasts for a relatively short time period. Our results are consistent with firms behaving strategically in response to heightened career/reputation concerns and endangered corporate control arising from hedge fund activism.

Keywords: Voluntary disclosures, earnings management, strategic behavior, shareholder activism

JEL Classification: G23, G34, M41

Suggested Citation

Khurana, Inder K. and Li, Yinghua and Wang, Wei, The Effects of Hedge Fund Interventions on Strategic Firm Behavior (August 10, 2017). Management Science, Forthcoming ; Fox School of Business Research Paper No. 17-029. Available at SSRN: https://ssrn.com/abstract=3016995

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

Yinghua Li (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States
480-965-5188 (Phone)

HOME PAGE: http://my.wpcarey.asu.edu/directory/people/profile.cfm?person=2255159

Wei Wang

Temple University - Fox School of Business ( email )

Alter Hall 450
1801 Liacouras Walk
Philadelphia, PA 19122
United States

Paper statistics

Downloads
253
Rank
102,692
Abstract Views
1,163