Returns to Hedge Fund Activism: An International Study
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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