Threat of Hedge Fund Activism and Risky Investment

40 Pages Posted: 28 Jun 2021

See all articles by Emil Lakkis

Emil Lakkis

University of Michigan, Stephen M. Ross School of Business

Date Written: June 16, 2021

Abstract

I study the effect of a threat of hedge fund activism on corporate investment. I find that managers are less likely to undertake acquisitions when subject to a higher threat of activism. They decrease the number of risky, value-creating acquisitions undertaken by the firm. I present evidence that the results can be explained by the manager's exposure to firm-level risk. Hedge fund activists often pursue a restructuring of the target firms, which may increase the riskiness of the firm's assets and reduce the manager's incentives to take on new risky projects. Overall, my results demonstrate that activists can create ex-ante inefficiencies by altering the incentives-risk sharing tradeoff of the manager's compensation contract.

Keywords: Corporate Governance, Hedge Fund Activism, Shareholder Activism

JEL Classification: G14, G23, G32, G34

Suggested Citation

Lakkis, Emil, Threat of Hedge Fund Activism and Risky Investment (June 16, 2021). Available at SSRN: https://ssrn.com/abstract=3868341 or http://dx.doi.org/10.2139/ssrn.3868341

Emil Lakkis (Contact Author)

University of Michigan, Stephen M. Ross School of Business

701 Tappan Street
Ann Arbor, MI Michigan 48109
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
145
Abstract Views
633
Rank
301,944
PlumX Metrics