Activist Hedge Fund Success: The Role of Reputation

Wiersema, M, Albert, A., and Y. Zhang. 2020. “Activist Hedge Fund Success: The Role of Reputation.” Strategic Management Journal. Vol. 41(13):2493-2517.

41 Pages Posted: 23 Sep 2020 Last revised: 6 Nov 2020

Date Written: May 9, 2020

Abstract

Activist hedge funds are the new breed of corporate raiders, yet we know little about how the management and board of target firms respond to activist investors. Using a behavioral perspective, we propose that the activist’s reputation for being confrontational may serve as a signal that conveys information by which to assess the likely behavior of the activist investor, which in turn influences whether or not management and the board acquiesce to its demands. Given that a campaign waged by a confrontational activist can draw attention and increased scrutiny to the company’s performance and strategy as well as be costly to engage in, we predict that management and the board may choose to settle with the activist in order to avoid such a confrontation. We propose and find that activists with a reputation for being confrontational will have greater success in getting their demands met.We also provide evidence that the effect of an activist’s reputation on campaign success extends to both major (e.g., business strategy) and minor (e.g., capital structure) demands. Our paper contributes to corporate governance research by providing insight on how the management and board of target firms respond when an activist knocks on the door. The paper provides evidence as to the importance of the social context surrounding activist campaigns and the role of reputation in influencing how companies respond to activist investors.

Keywords: Activist hedge funds, reputation, corporate governance, market signaling, executive decision-making

JEL Classification: L20, L25, G23, G32, G34, G38

Suggested Citation

Wiersema, Margarethe, Activist Hedge Fund Success: The Role of Reputation (May 9, 2020). Wiersema, M, Albert, A., and Y. Zhang. 2020. “Activist Hedge Fund Success: The Role of Reputation.” Strategic Management Journal. Vol. 41(13):2493-2517., Available at SSRN: https://ssrn.com/abstract=3670201

Margarethe Wiersema (Contact Author)

University of California, Irvine ( email )

Irvine, CA 62697-3125
United States

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