Using a large hand-collected dataset from 2001 to 2006, we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in two thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring.

Hedge Fund Activism, Corporate Governance, and Firm Performance

Recent work documents large positive abnormal returns around the time that a hedge fund announces its activist intentions with a publicly listed firm. We show that these returns are largely explained by the ability of activists to force target firms into a takeover: In a comprehensive sample of 13D filings by portfolio investors between 1993 and 2006, we find that announcement returns and long-term abnormal returns are high for the subset of targets that are acquired ex-post, but not detectably different from zero for firms that remain independent eighteen months after the initial filing. We show that firms that are targeted by activists are more likely to get acquired than those in a control sample. Finally, we show that the portfolios managed by activist investors perform poorly during a period in which market-wide takeover interest declined.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1135332_code280104.pdf?abstractid=1003792&rulid=9391373&mirid=2

Investor Activism and Takeovers

We examine 'just vote no' campaigns, a recent innovation in low-cost shareholder activist tools whereby activists encourage their fellow shareholders to withhold votes toward a director's election to express dissatisfaction with management performance or the firm's corporate governance structure. Grundfest (1993) argues that a substantial withheld vote will motivate directors to take immediate action to avoid further embarrassment. We find a variety of supportive evidence, including operating performance improvements and abnormal disciplinary CEO turnover, indicating that campaigns induce boards to take actions in shareholders' interests. Furthermore, abnormal turnover is robust to controlling for concurrent events and firm- and CEO-specific controls.

Do Boards Pay Attention When Institutional Investor Activists 'Just Vote No'?

This paper examines the relation between corporate lobbying and fraud detection. Using data on corporate lobbying expenses between 1998 and 2004, and a sample of large frauds detected during the same period, we find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1648671_code170029.pdf?abstractid=954368&mirid=1&type=2

Corporate Lobbying and Fraud Detection

This paper reviews the theoretical and empirical literature on the different channels through which blockholders (large shareholders) engage in corporate governance. In classical models, blockholders exert governance through direct intervention in a firm’s operations, otherwise known as “voice.” These theories have motivated empirical research on the determinants and consequences of activism. More recent models show that blockholders can govern through the alternative mechanism of “exit” – selling their shares if the manager underperforms. These theories give rise to new empirical studies on the two-way relationship between blockholders and financial markets, linking corporate finance with asset pricing. Blockholders may also worsen governance by extracting private benefits of control or pursuing objectives other than firm value maximization. I highlight the empirical challenges in identifying causal effects of and on blockholders, and the typical strategies attempted to achieve identification. I close with directions for future research.

Stephen Phillip Huffman

Papers

Value Creation or Destruction? Hedge Funds as Shareholder Activists

Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk?

Dividend Policy, Shareholder Rights, and Corporate Governance

Corporate Political Contributions and Stock Returns

Does Sovereign Debt Ratings News Spill Over to International Stock Markets