The Unfulfilled Promise of Hedge Fund Activism
Forthcoming, Virginia Law & Business Review
Posted: 19 Apr 2019 Last revised: 23 Sep 2019
Date Written: March 9, 2019
Hedge fund activism has mostly disappointed. While hedge fund activists are good at motivating sales of companies to potentially-overpaying acquirers, hedge fund activism is neither the threat to corporate strength that hostile commentators have claimed nor a meaningful force for better corporate performance. Instead, more than a decade of research shows hedge fund activism to be economically unimportant to corporate performance one way or the other. Hedge fund activists have disappointed their investors as well, generating unimpressive returns. I explore three reasons why hedge fund activism has mostly disappointed. First, hedge fund activists have no comparative advantage in generating ideas for meaningful competitive advantage at target firms. Second, hedge fund activists likely suffer from a form of winner’s curse where the hedge fund activist is too pessimistic about the firm it targets. Third, hedge fund activists often target declining firms, the equity in which is often unsalvageable by the time the activist has taken notice. In the end – and in the spirit of Edison’s famous comment about his failures on his way to inventing the light bulb – we have learned little more from a decade of research on hedge fund activism than one additional way that shareholder activism does not work.
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