Activist Hedge Funds: Evidence from the Recent Financial Crisis

Abstract

This study extends the empirical evidence of hedge fund activism impact on target firm performance. We investigate whether activism strategies as well as their effects have changed following the recent financial crisis of [2007][2008]. The analysis is based on the U.S. data covering 112 hedge funds, 551 target firms, from 2000 to 2013. We find that returns to activism accrue to approximately 5% during the (-20, +5) event window. Activism-related categories that generate significant and positive abnormal returns include capital structure, business strategy, and general undervaluation. Since the financial crisis, business-related activism generates the highest returns, followed by activism in financially depressed firms. We also find significant cross-sectional abnormal returns, both before and during the crisis, for hedge funds who do not pre-specify an objective. One year post-activism performance suggests that target firms experience substantial improvement in value, profit margin, and investment.