Does Hedge Fund Activism Improve Investment Efficiency in US Firms?

66 Pages Posted: 21 Nov 2019 Last revised: 9 Aug 2021

See all articles by Amanjot Singh

Amanjot Singh

King's University College at Western University

Saikat S. Deb

Deakin Business School, Deakin University

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. On average, targets’ investment efficiency improves after experiencing hedge fund activism. However, activism improves investment efficiency only for overinvested target firms by reducing their propensity to overinvest. Investment efficiency is associated with closer involvement of activist hedge funds through private settlements and board representations. Further, hedge fund activism does not significantly affect the investment efficiency of underinvested target firms. We find that managers’ hostile resistance to activism (managerial entrenchment) is positively associated with firms’ likelihood of underinvestment. Overall, our findings suggest that it is relatively easier for activist hedge funds to monitor assets-in-place and influence managers to reduce overinvestment. This reduction in overinvestment also creates a positive impact on firm value.

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

King's University College at Western University ( email )

266 Epworth Ave
London, N6A2M3
Canada
N6A2M3 (Fax)

Saikat Sovan Deb (Contact Author)

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

Harminder Singh

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

221 Burwood Highway
Burwood, Victoria 3215
Australia

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