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Journal ArticleDOI

Returns to Hedge Fund Activism: An International Study

TL;DR: In this paper, the authors used a sample of 1,740 activist engagements from 23 countries to estimate performance of activism across North America, Europe and Asia, and found that non-U.S. activists outperform U.S activists in their domestic markets.
Abstract: This paper provides evidence that returns to hedge fund activism are driven by engagement outcomes. We use a sample of 1,740 activist engagements from 23 countries to estimate performance of activism across North America, Europe and Asia. Striking differences emerge across countries in outcomes of the engagements. It is these differences that explain the variation in performance of activism. Although there is evidence that activists put companies into play, frequently those takeovers are preceded by significant and profitable governance changes. While the U.S. model of activism has been copied by foreign activists, non-U.S. activists outperform U.S. activists in their domestic markets.

Summary (3 min read)

1.1 Database construction

  • To complete the database at the company level, the authors obtain annual firm financials from Factset Fundamentals, and daily stock prices and trading volume data from CRSP for U.S. firms and from Datastream for non-U.S. firms.
  • Germany, Italy, France, South Korea, the Netherlands, and Canada (in declining order).
  • In addition, the table reports summary statistics for all 958 engagements in their sample for which the authors have FactSet coverage, and for comparative purposes the same data for all other companies with FactSet coverage, in each of the respective countries.

1.2 Activism across countries

  • While the United States and the United Kingdom have the largest number of engagements, in relative terms activism is less frequent after adjusting for the number of listed companies than in Italy or Germany.
  • Table 2 shows activist activity as engagements per 1,000 listed firms.
  • After the United States, among large economies activism is relatively most frequent in Italy, the Netherlands, Germany and Switzerland (in declining order), none of which are typically labeled as having active markets for corporate control.
  • The table also compares activism to unsolicited takeover bids.
  • Similar results obtain when the authors annualize activist activity.

2. International Activism

  • Finally, institutional and legal characteristics of a country may influence activism.
  • Prior research suggests that several dimensions of country characteristics might be important for hedge fund activism.
  • Across countries, shareholders may require as little as 5% or as much as 20% to exercise this right (the United States/Delaware being an exception, where shareholders generally cannot call an EGM, but can launch a proxy fight).
  • Differences in anti-director rights should therefore affect the ease with which activists can engage.
  • Other country characteristics that are likely to matter are institutional ownership, board composition, governance quality, reporting regulations for ownership, among others.

3. Results

  • Third, the authors examine the influence of the nationality of the activist, domestic, foreign or foreign-U.S., on the success of the engagements.
  • Fourth, and finally, the authors examine how country specific characteristics affect activism performance and outcomes.

3.1 Likelihood of engagement across countries

  • Considering how firm characteristics relate to activist engagements, Table 4 yields two additional insights.
  • First, controlling for other factors, firm size has little effect on engagement probability.
  • While Brav et al. (2008) find that engagements are concentrated among smaller firms in the United States from 2001 to 2006, this study finds that hedge fund activists around the world appears to be less constrained by the size of market capitalization of the target firm.
  • Second, broadly consistent with Brav et al. (2008) and other prior U.S. findings, activists behave as value investors in their choice of targets.
  • Those targets have lower market-to-book, higher payout ratios, lower investment, and higher cash balances.

3.2 Engagement announcement returns

  • The authors find that disclosure abnormal returns for domestic engagements are 7.0% during the (-20, 20) event window for domestic engagements compared with 3.6% to 3.8% for foreign engagements.
  • Again, domestic engagements are similar for U.S. and non-U.S. activists.
  • This suggests that domestic activism may be more profitable than foreign activism if engagement costs are similar.

3.3 Outcome probabilities and disclosure returns around outcomes

  • To better understand this specialization of funds, the authors consider the engagement performance of the subsample of U.S. hedge funds which invest in targets both domestically and overseas.
  • There are 24 hedge funds in their sample which engage with both domestic and foreign targets, out of a sample of 261 U.S. hedge funds.
  • These include some of the largest funds in the sample by number of engagements, Steel Partners, ValueAct Capital Partners, Carl Icahn, and Third Point.
  • The authors compare, for each such fund, the probability of achieving outcomes in foreign engagements to the probability of achieving outcomes in domestic engagements.
  • The authors find a strong negative correlation between both probabilities for the sample of 24 hedge funds, suggesting that success domestically does not translate into success overseas, and vice versa.18.

3.4 Total engagement returns

  • Overall, the results confirm that activist engagements without outcomes generally do not generate significant shareholder value under any specification.
  • Engagements with outcomes however generate value for shareholders, with value generation being closely linked to these outcomes.
  • The authors also find that the relative performance improvements in large engagements over time are most pronounced in those engagements without observable outcomes.
  • The authors data do not allow us to test why activist engagements without observable outcomes generate superior performance.
  • One conjecture is that activists, particularly in large firms, increasingly may be able to change how investors perceive firm value via outcomes that are more subtle and harder to measure than those specified by us.

3.5 Country differences in activism

  • In summary, country characteristics matter for the decision of activists to engage a target, and for whether an outcome is achieved.
  • Conditional on observing an engagement, country characteristics do not correlate with measures of financial performance, such as initial disclosure returns and outcome disclosure returns.

4. Conclusion

  • Institutional investors are related to the incidence of activism across countries.
  • The increase and spread of U.S. foreign institutional holdings has significantly contributed to hedge fund activism becoming a global phenomenon.
  • The dotted line (right axis) shows average cumulative abnormal returns around the initial filing date or the first press disclosure date of engagements, market model adjusted.
  • The event window is (-20, +20) days, where day zero corresponds to the filing or press disclosure date.
  • Factor loadings are estimated over 250 trading days preceding the event window, using country-specific domestic market returns, with a minimum of 150 daily observations (1,617 out of 1,740 sample deals have sufficient data).

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LBS Research Online
M Becht, J R Franks, J Grant and H F Wagner
Returns to Hedge Fund Activism: An International Study
Article
This version is available in the LBS Research Online repository:
https://lbsresearch.london.edu/
id/eprint/831/
Becht, M, Franks, J R, Grant, J and Wagner, H F
(2017)
Returns to Hedge Fund Activism: An International Study.
Review of Financial Studies, 30 (9). pp. 2933-2971. ISSN 0893-9454
DOI: https://doi.org/10.1093/rfs/hhx048
Oxford University Press (OUP)
https://academic.oup.com/rfs/article/30/9/2933/385...
Users may download and/or print one copy of any article(s) in LBS Research Online for purposes of
research and/or private study. Further distribution of the material, or use for any commercial gain, is
not permitted.

Returns to Hedge Fund Activism: An International Study
Marco Becht
Solvay Brussels School, Université libre de Bruxelles, CEPR, and ECGI
Julian Franks
London Business School, CEPR, and ECGI
Jeremy Grant
Berenberg Bank
Hannes F. Wagner
Bocconi University and IGIER
Review of Financial Studies, forthcoming
27 May 2014
Revised 15 September 2016
We are grateful to Robin Greenwood and Andrew Karolyi (the editors); two anonymous referees; and
John Armour, Tara Bhandari, Alon Brav, Nick Gantchev, Pedro Matos, Janis Skrastins, Oren Sussman,
Phillip Goldstein (Bulldog Investors), David Trenchard (formerly Knight Vinke), John Armstrong-
Denby (Edmond de Rothschild), and Mark Levine (Elliott Management). We also thank the
participants at the Transatlantic Corporate Governance Dialogue (TCGD) in Washington DC in
December 2011, the EU-ASIA Corporate Governance Dialogue Inaugural Conference in Tokyo in June
2012, the European Financial Management Association in Rome in June 2014, the European Finance
Association in Lugano in August 2014, the 4nations Cup in Rome in May 2015, and the Western
Finance Association in Seattle in June 2015 and seminar participants at Bar Ilan, Bocconi University,
the Hanken School of Economics, Koç Business School, the London Business School, Luxembourg
School of Finance, Rotterdam University, University of Oxford, and Tilburg University for comments.
Song Zhang and Yordana Mavrodieva provided excellent research assistance. We acknowledge
research support from the ESRC [grant no. R060230004], the London Business School’s Centre for
Corporate Governance, the BNP Paribas Hedge Fund Centre, the Goldschmidt Chair at the Solvay
Brussels School of Economics and Management, Université libre de Bruxelles, and the PEGGED
(Politics, Economics and Global Governance: The European Dimensions) collaborative research
project supported by the Seventh Framework Programme for Research and Technological
Development [contract no. SSH7-CT-2008-217559]. Send correspondence to Marco Becht, Universite
libre de Bruxelles, Avenue F. D. Roosevelt 50, CP114, 1050 Brussels, Belgium; telephone: +32 2 650
4466. E-mail: mbecht@ulb.ac.be.

Returns to Hedge Fund Activism: An International Study
Abstract
This paper provides evidence on the incidence, characteristics, and performance of activist
engagements across countries. We find that the incidence of activism is greatest with high institutional
ownership, particularly for U.S. institutions. We use a sample of 1,740 activist engagements across 23
countries and find that almost one-quarter of engagements are by multi-activists engaging the same
target. These engagements perform strikingly better than single activist engagements. Engagement
outcomes, such as board changes and takeovers, vary across countries and significantly contribute to
the returns to activism. Japan is an exception, with high initial expectations and low outcomes. (JEL
G32)

1
This paper provides evidence on the incidence, characteristics, and performance of activist
engagements across countries. The scope of this paper allows us to address the question of how
different patterns of ownership and institutional arrangements influence the growth and performance
of activism. Our paper is the first comparative study of publicly observable activism across 23
countries in Asia, Europe, and North America. We analyze 1,740 activist interventions, mainly
initiated by hedge funds and focus funds, for the 2000-2010 period. The three largest markets for
shareholder activism are the United States (1,125 interventions), Japan (184 interventions), and the
United Kingdom (165 interventions). Despite this apparent concentration, activism is a significant
phenomenon relative to the size of stock markets in other countries (e.g., Italy). Further, because
activists hold limited stakes—11%, on average—they require the support of other investors, including
pension funds and other activists. We interpret our results as showing that the pattern of ownership is
an important source of influence on activism activity across countries.
Our sample covers 330 different activist funds. Most funds have a clear domestic focus, but
foreign engagements account for 24% of the total, roughly equally split between U.S.-based and non-
U.S.-based activists, allowing us to compare domestic and foreign models of activism. Hedge fund
engagements frequently involve more than one hedge fund (“wolf pack”) that may coordinate
formally or informally. We estimate that wolf packs are associated with almost one quarter of all
engagements and we show that they achieve some of the highest returns for target shareholders.
How do activist engagements perform? The conventional measure of activists’ performance is
the abnormal return around the public announcement of the activist’s stake. We find abnormal
announcement returns of 7.0% for the United States during a (-20, 20) day window, which are virtually
identical to those reported by Brav et al. (2008) and related studies. The European and Asian

2
announcement returns are significant at 4.8% and 6.4%, respectively, and are comparable to the United
States.
How successful are activists in their engagements with target firms? For this analysis, we
identify the outcomes of each engagement, including changes to payout policy, governance, corporate
restructuring and takeovers. Compiling data on activist outcomes internationally is particularly
challenging; while activists engaging U.S.-listed firms need to provide information on the stated
purpose of their investment in Schedule 13D filings, no exact equivalent exists elsewhere. Through
extensive news searches, we identify outcomes of the engagements.
For the entire sample, the unconditional probability of an activist being successful in achieving
at least one engagement outcome is 53%. However, the incidence of outcomes varies considerably
across countries. In North America activists achieve outcomes in 61% of all engagements and 50% in
Europe, but only 18% in Asia. Japan, in particular, is a country of unfulfilled expectations with high
disclosure returns but very few outcomes.
We also show that the incidence of engagement outcomes and the type of outcome dramatically
affect the abnormal returns over the entire engagement, from block disclosure to exit. The
announcement of an engagement outcome contributes significantly to holding period returns during the
engagement. Abnormal returns around the announcement of outcomes average 6.4% across all
countries during a (-20, 20) window, with the highest returns of 8.8% in Europe, 6.0% in North
America and 2.7% in Asia. These returns are in addition to the block disclosure returns for the
subsample of engagements with successful outcomes. To investigate the potential importance of
governance changes initiated by the activist, we test whether engagements with multiple outcomes, for
example, a board change or spin-off followed by a takeover, have a higher total return than a single
outcome, such as a takeover. The differences are striking, particularly engagements with multiple

Citations
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Abstract: This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the period 2001-2010, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a stock to the MSCI indexes. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.

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TL;DR: In this paper, the authors conducted a comprehensive empirical investigation, examining a long five-year window following activist interventions, and found no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; the evidence is consistent with the initial spike reflecting correctly the intervention's long-term consequences.
Abstract: We test the empirical validity of a claim that has been playing a central role in debates on corporate governance — the claim that interventions by activist hedge funds have a detrimental effect on the long-term interests of companies and their shareholders. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data. We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Our findings have significant implications for ongoing policy debates. Policymakers and institutional investors should not accept the validity of the assertions that activist interventions are costly to firms and their shareholders in the long term; such claims do not provide a valid basis for limiting the rights, powers, and involvement of shareholders.

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TL;DR: A review of the theoretical and empirical literature on the role of blockholders in corporate governance can be found in this paper, where a simple unifying model is presented to present theories of blockholder governance through both voice (direct intervention) and exit (selling one's shares).
Abstract: This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in addressing free-rider problems and why, like owners of private property in general, blockholders are likely to be active in firm governance. We then examine what distinguishes a blockholder from an ordinary shareholder and advocate additional definitions from the typical threshold of 5% ownership. We next present new evidence on the frequency and characteristics of blockholders in United States corporations. Then we develop a simple unifying model to present theories of blockholder governance through both voice (direct intervention) and exit (selling one's shares). We survey the empirical evidence on blockholder governance, emphasizing the empirical challenges in identifying causal effects involving blockholders. We highlight the lack of credible instruments for blockholders and argue that exogenous variation should not be a prerequisite for research—a narrow focus on identification may lead to a focus on identifying narrow questions. We emphasize the value of descriptive research with blockholders and how endogeneity concerns can be addressed with economic logic and by directly testing alternative explanations. We close with suggestions for future research.

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Frequently Asked Questions (1)
Q1. What have the authors contributed in "Returns to hedge fund activism: an international study" ?

This paper provides evidence on the incidence, characteristics, and performance of activist engagements across countries.