Dissatisfied Investors and Hedge Fund Activism

Abstract

This paper utilizes a rich literature on institutional investors' governance roles and develops simple measures of institutional discontent expressed through holding, trading and voice channels to predict hedge fund activism target selection. Discontent expressed through all three channels leads to subsequent targeting. Medium sized dissatisfied owners and sellers seem to be the main driving force and institutions' discretionary disagreement on management compensation and governance related proposals have the highest explanatory power. Activists are more likely to gain higher announcement returns and threaten to take hostile actions against management with more discontent institutional investors in the target companies. Discontent institutions are more likely to vote pro-activist in the annual meetings after campaigns.

Keywords: Hedge fund activism, Corporate governance, Institutional investors

JEL Classification: G30, G23, G34