Does Hedge Fund Activism Improve Investment Efficiency in US Firms?

59 Pages Posted: 21 Nov 2019 Last revised: 11 Jan 2020

See all articles by Amanjot Singh

Amanjot Singh

Deakin University - Department of Finance

Saikat S. Deb

Deakin University - School of Accounting, Economics and Finance

Harminder Singh

Deakin University - School of Accounting, Economics and Finance

Date Written: October 12, 2019

Abstract

We examine the impact of hedge fund activism on investment efficiency in target firms. We find that firms are more responsive to investment opportunities after experiencing hedge fund activism. Activism reduces the propensity of overinvestment in target firms though it does not significantly affect the investment efficiency of underinvested firms. Consistent with Boyson & Pichler (2018), we find, managers’ hostile resistance to activism is positively associated with firms’ likelihood of underinvestment. Our findings are congruent with Smith and Watts (1992) and Bebchuk and Stole (1993) - as it is difficult for shareholders to assess the managerial response to growth opportunities, hence it is difficult to monitor underinvestment problem. However, it is relatively easier for activist hedge funds to monitor assets in place and influence managers to reduce overinvestments.

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

JEL Classification: G30, G31

Suggested Citation

Singh, Amanjot and Deb, Saikat Sovan and Singh, Harminder, Does Hedge Fund Activism Improve Investment Efficiency in US Firms? (October 12, 2019). Available at SSRN: https://ssrn.com/abstract=3485352 or http://dx.doi.org/10.2139/ssrn.3485352

Amanjot Singh

Deakin University - Department of Finance ( email )

Burwood, Victoria 3125
Australia

Saikat Sovan Deb (Contact Author)

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

Building lb Room 5.305
221 Burwood Highway Victoria
Burwood, Victoria 3125
Australia
0061 3 92517745 (Phone)
+61 3 9244 6283 (Fax)

HOME PAGE: http://www.deakin.edu.au/buslaw/aef/

Harminder Singh

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

221 Burwood Highway
Burwood, Victoria 3215
Australia

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