Disappearing Discounts: Hedge Fund Activism in Conglomerates

65 Pages Posted: 16 Nov 2017 Last revised: 9 Mar 2020

See all articles by Sehoon Kim

Sehoon Kim

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: March 8, 2020

Abstract

Hedge fund activism removes the diversification discount in targeted conglomerate firms. Targeted conglomerates increase investment in segments with better growth opportunities, while reducing each division's over-reliance on their own cash flow relative to their reliance on cash flows from other segments. These improvements are stronger when firms are ex-ante financially constrained, when CEOs are subsequently replaced by outsiders, and when payout is subsequently increased. Refocusing is no more valuable than increasing internal efficiency. The results are not driven by mean reversion. The results are consistent with hedge funds' skill in unlocking the value of internal capital markets in diversified firms.

Keywords: Conglomerates, Corporate Governance, Diversification, Hedge Fund Activism, Internal Capital Markets, Resource Allocation

JEL Classification: G23, G31, G32, G34

Suggested Citation

Kim, Sehoon, Disappearing Discounts: Hedge Fund Activism in Conglomerates (March 8, 2020). Available at SSRN: https://ssrn.com/abstract=3070676 or http://dx.doi.org/10.2139/ssrn.3070676

Sehoon Kim (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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