Hedge fund investor activism and human capital loss

Abstract

Research summary: Prior research suggests that hedge fund activism can benefit targeted firms. We explore a potential negative side‐effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that firms targeted by hedge fund activists experience a greater departure of valuable employees compared with a matched sample of non‐targeted firms. Further, the positive effect of hedge fund activism on firm performance is stronger when firms experience a lower departure of valuable employees. These results suggest that hedge fund activism can lead to the unwanted loss of human capital, which may reduce the otherwise positive performance effect on targeted firms. These findings contribute to research on investor activism and human capital. Managerial summary: Hedge fund activism has been shown to benefit shareholders of targeted firms. We investigate a potential negative side‐effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that targeted firms experience a greater departure of valuable employees when attacked by hedge fund activists, and that the positive performance effect of hedge fund activism is greater if that departure is smaller. Our results, together with additional analyses, are consistent with our argument that valuable employees decide to leave firms targeted by hedge fund activists to reduce the potential uncertainty and adversity for their careers, and that this human capital loss can harm firm performance. Our study has important implications for firms facing the potential prospect of hedge fund activism.

Interorganizational Spillover: A Review and a Proposal for Future Research

“…Therefore, top managers need to actively manage employees’ reactions to events that take place in other firms. To manage employee reactions requires managers of peer organizations to identify events that can trigger negative employee reactions that can result in undesired employee turnover (e.g., hedge fund activism, see G. Chen, Meyer-Doyle, & Shi, in press).…”

Chief executive officer positive framing and employee ownership

“…Second, the rate of employee turnover cannot be influenced by the behaviors of an individual employee. As comprehensive data on the firm-level turnover of employees is not publicly available, we followed Carter and Lynch (2004) and Chen, Meyer-Doyle, and Shi (2020) to measure employee turnover as the percentage of stock options canceled, forfeited, or expired in the total number of nonexecutive employee stock options outstanding. Cancellations, forfeitures, and expiration of stock options are reasonable proxies for employee turnover because these typically occur upon employee separation from the firm.…”

Activist Hedge Funds and Takeovers: Their Effects on Employment and Performance

“…Equally, there are cases in our dataset where AHFs pressured managers to mount several takeovers with a view to both diversification and disposal of surplus activities. In ‘behind‐the‐scenes’ negotiations with management, AHFs often push for divestments, along with employment reductions and lay‐offs (Chen, Meyer‐Doyle and Shi, 2021). A good example in our dataset is the takeover of former Monopoly ‐maker Waddington by the John Mansfield Group in 1999.…”

“…Specifically, activist hedge funds (AHFs) now play a major role in mergers and acquisitions (M&As) and subsequent corporate restructuring (Boyson, Gantchev and Shivdasani, 2017; Gantchev, Sevilir and Shivdasani, 2020; Greenwood and Schor, 2009). As in takeovers initiated by other types of investors (see Amess, Girma and Wright, 2014; Conyon et al ., 2002), restructuring initiated by AHFs can involve employment reductions (Chen, Meyer‐Doyle and Shi, 2021; DesJardine and Durand, 2020), wage cuts (Brav, Jiang and Kim, 2015) and divestitures (Gantchev, Sevilir and Shivdasani, 2020), all aimed at securing immediate gains in company value and operating performance. Some argue that these initiatives breach long‐term implicit contracts with employees (Agrawal and Lim, 2021) and facilitate wealth transfer from employees to shareholders (Coffee and Palia, 2016).…”