Stakeholders’ Learning Curve of Hedge Fund Activism: Evidence From Audit Pricing

Posted: 26 Apr 2018 Last revised: 14 Feb 2020

See all articles by Su Wang

Su Wang

Southampton Business School, University of Southampton; China Life Property & Casualty Insurance Co. Ltd.

Pingli Li

Southampton Business School, University of Southampton

Jason Zezhong Xiao

University of Macau

Zhuang Zhang

University of Southampton - Southampton Business School

Qingjing Zhang

University of Southampton - Southampton Business School

Date Written: September 1, 2018

Abstract

This study examines how hedge fund activism (HFA) affects the perception of risk among stakeholders who are responsible for and oversee firms’ financial reports (auditors, managers, and audit committees). We propose that engagement by hedge fund activists introduces uncertainty about firms’ future operations and financial policies, which initially elevates perceived risk. However, the increased risk perception dissipates over time as uncertainty reduces, following knowledge spillover and the outcome of change becoming clearer. Our results show that audit fees for HFA-target firms increase significantly in the year of intervention and for two years subsequent, after which they revert during the next three years. The results provide for a fresh and feasible explanation for the gap between the negative public reaction and positive empirical evidence on HFA. They imply that policymakers should not be urged to tighten regulations on HFA but rather allow more time for them to be understood.

Keywords: Hedge Fund Activism, Shareholder Activism, Corporate Governance, Ownership Structure, Audit Pricing, Audit Fee, Audit Risk

JEL Classification: M42, G14, G23, G32, G34

Suggested Citation

Wang, Su and Wang, Su and Li, Pingli and Xiao, Jason Zezhong and Zhang, Zhuang and Zhang, Qingjing, Stakeholders’ Learning Curve of Hedge Fund Activism: Evidence From Audit Pricing (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=3159214 or http://dx.doi.org/10.2139/ssrn.3159214

Su Wang

Southampton Business School, University of Southampton ( email )

Room 5023, Building 2
University of Southampton
Southampton, Hampshire SO17 1BJ
United Kingdom

China Life Property & Casualty Insurance Co. Ltd. ( email )

China Life Center
Xicheng District
Beijing, 100033
China

Pingli Li

Southampton Business School, University of Southampton ( email )

Highfield,
Southampton, SO17 1BJ
United Kingdom

Zhuang Zhang

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

Qingjing Zhang

University of Southampton - Southampton Business School ( email )

SO17 1BJ
United Kingdom

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