Geography and Hedge Fund Activism

Abstract

This paper studies the role of geographical proximity in hedge fund activism. I find that activist hedge funds are more likely to target firms located closer to their headquarters. Targets are 58.2% more likely than similar firms to be located within 100 kilometers of the hedge fund. Surprisingly, returns from activism are significantly lower for proximate targets. These lower gains are not explained by economic factors, including selection effects, the costs of activism, and the difficulty of transferring wealth from employees of nearby targets. Rather, results are consistent with the presence of a familiarity bias, where activist hedge funds prefer nearby targets even though such targets deliver lower gains.

Keywords: Hedge fund activism, geographical proximity, employee benefits, familiarity bias

JEL Classification: G23, G34