Does hedge fund activism improve investment efficiency?

42 Pages Posted: 21 Nov 2019 Last revised: 15 May 2023

See all articles by Saikat S. Deb

Saikat S. Deb

Deakin Business School, Deakin University

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Amanjot Singh

King's University College at Western University

Harminder Singh

Deakin University - School of Accounting, Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 12, 2019

Abstract

We examine the impact of hedge fund activism (HFA) on the investment efficiency of target firms. We find that target firms’ investment efficiency improves after the active involvement of hedge funds. This improvement is mainly evident for HFA campaigns with investment strategy-related reforms as one of the main stated objectives. Among investment strategy-related HFA campaigns, the changes in investment efficiency are more pronounced when hedge funds obtain board representation or privately settle with target firms. HFA improves the investment efficiency of target firms by mitigating overinvestment rather than underinvestment problems. Additional tests reveal that target firms with no resistance to HFA and higher free cash flow accommodate this improvement in investment efficiency following HFA. Overall, our findings highlight the role of HFA as a governance mechanism in improving investment efficiency and influencing managers to reduce overinvestment.

Keywords: Investment efficiency, hedge fund activism, overinvestment, underinvestment

JEL Classification: G30, G31

Suggested Citation

Deb, Saikat Sovan and Duong, Huu Nhan and Singh, Amanjot and Singh, Harminder, Does hedge fund activism improve investment efficiency? (October 12, 2019). Available at SSRN: https://ssrn.com/abstract=3485352 or http://dx.doi.org/10.2139/ssrn.3485352

Saikat Sovan Deb

Deakin Business School, Deakin University ( email )

221 Burwood Highway Victoria
Burwood, Victoria 3125
Australia
0061 3 92517745 (Phone)
+61 3 9244 6283 (Fax)

HOME PAGE: http://https://www.deakin.edu.au/about-deakin/people/saikat-sovan-deb

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Amanjot Singh (Contact Author)

King's University College at Western University ( email )

266 Epworth Ave
London, N6A2M3
Canada
N6A2M3 (Fax)

Harminder Singh

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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