Hedge Fund Activism and Financial Performance

Forthcoming in The Oxford Handbook of Hedge Funds (Douglas Cumming and Geoffrey Wood, eds.)

24 Pages Posted: 7 Aug 2019

Date Written: August 4, 2019

Abstract

Up to the late 1990s, there was little evidence that shareholder activism generated any economically meaningful improvements in share prices or the operating performance of corporations. By the early 2000s, however, a new form of shareholder activism began to emerge: shareholder activism by hedge funds. Hedge fund activism promised to be different and more effective than past efforts. As it turned out, however, the promise of hedge fund activism has been largely, though not entirely, unfulfilled. Hedge fund activists have influenced corporate managers to increase shareholder value, and in that sense they have succeeded where prior activists failed, doing more to compensate for a bridled market for corporate control than previous activism. But the success of hedge fund activists has been narrow; they seem to succeed only when they facilitate the sale of the target firm. The main focus of this chapter is to explore why hedge fund activism has been so limited in its successes. I conclude that there likely is no form of shareholder activism that will add real value for shareholders beyond facilitating the sale of the firm. The problem, in other words, is not with the nature of the activist. The problem is with the nature of corporations themselves and the limits of “outsideness.”

Keywords: shareholder activism, hedge fund activism, agency costs, corporate decline

Suggested Citation

Heaton, J.B., Hedge Fund Activism and Financial Performance (August 4, 2019). Forthcoming in The Oxford Handbook of Hedge Funds (Douglas Cumming and Geoffrey Wood, eds.). Available at SSRN: https://ssrn.com/abstract=3432064 or http://dx.doi.org/10.2139/ssrn.3432064

J.B. Heaton (Contact Author)

J.B. Heaton, P.C. ( email )

20 West Kinzie
17th Floor
Chicago, IL 60654
United States
(312) 487-2600 (Phone)

HOME PAGE: http://jbheaton.com

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