Does Hedge Fund Activism Improve Investment Efficiency in US Firms?
59 Pages Posted: 21 Nov 2019 Last revised: 11 Jan 2020
Date Written: October 12, 2019
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: Suggested Citation