Recent Advances in Research on Hedge Fund Activism: Value Creation and Identification

Abstract

Hedge fund activism has emerged as a major force of corporate governance since the 2000s. By the mid-2000s, there were between 150-200 activist hedge funds in action each year, advocating for changes in 200-300 publicly listed companies in the U.S. In this paper, we review the evolution and major characteristics of hedge fund activism, as well as the short-and long-term impact of such activities on the performance and governance of the targeted companies. Though most of the analyses are based on a comprehensive sample of over 2,000 activism events in the U.S. from 1994 to 2011, hand-collected by the authors from regulatory filings and news searches, this paper covers all major studies on the topic, including those on non-U.S. markets. I. Data on Hedge Fund ActivismThis section reviews the approaches researchers have taken to construct samples of hedge fund activism events. Data on activist interventions in the U.S. are generally based on Schedule 13D filings submitted to the SEC. Section 13(d) of the 1934 Securities Exchange Act requires investors who are beneficial owners of over 5% of any class of publicly traded securities of a company, and who have an intention to influence corporate control, to disclose their ownership and intent within 10 days of crossing the 5% threshold. The Schedule 13D filing provides the filing date and information about the identity of the filer, such as the filer's ownership and its changes, cost of purchase, and most importantly, the purpose of the investment (from Item 4 "Purpose of Transaction").It is important to note that the SEC allows beneficial owners who have purchased shares in the ordinary course of business and do not intend to influence control to file a Schedule 13G, which requires less information and allows the filer a longer delay in disclosure. Brav et al. (2008) summarize the stated objectives that the activist funds provide when they announce their intent to intervene into the following five major categories: II. Characteristics of Hedge Fund Activism Events"general undervaluation/maximize shareholder value," "capital structure," "business strategy," "sale of target company," and "governance." The objectives, except the first, are not mutually exclusive as one activist event can target multiple issues. The first category represents 59.5% of the sample and includes events in which the hedge fund believes that the company is undervalued and/or that the fund can help the manager maximize shareholder value. The second category (12.7% of the sample) includes activism targeting firms' payout policies and capital structure. The third set of events includes activism targeting issues related to business strategy, such as operational efficiency, business restructuring, mergers and acquisitions, and growth strategies. This group represents 17.8% of all events. The fourth category, comprising 15.2% of activist events, involves activism demanding the sale of the target. In this category, hedge funds attempt either to force a sale of the target company to a third par...

Voice and Action: Sell-Side Analysis and Hedge Fund Activism

“…Prior literature shows that activist hedge funds affect major changes in target firms and create value for shareholders (e.g. Brav et al 2008, Brav et al 2010Brav et al 2015a;Bebchuk et al 2015;Brav et al 2015b). Although activist hedge funds are the problem solvers of target firms and favored by shareholders, we show that sell-side analysts' negative voices reveal problems in target firms and facilitate hedge fund intervention outcomes.…”

“…Prior literature (eg. Brav et al, 2008;Brav et al, 2015b;Greenwood and Schor, 2009) summarize the objectives into five categories: "general undervaluation/maximize shareholder value," "capital structure," "business strategy," "sale of target company," and "governance." The first objective is stated when hedge fund activists have no more specific goals or tactics other than communication with management.…”

“…Hedge fund activism has played an increasingly important role in capital markets over the last decade. For example, the number of hedge fund activists has almost doubled since 2001 (Brav, Jiang and Kim, 2015b) and total assets under their management rose about tenfold since 2003 to around $115 billion in 2015 (PwC, 2016). The rapid growth of hedge fund activism has substantial impact on public companies.…”

“…In our regression model, the sign of ANALYST is positive (coefficient 0.012, t-stat 5.876). In the extant literature, it is unclear which direction of this coefficient should be expected Brav et al (2015b). points out possible multicollinearity problems between INST and ANALYST.…”

A recipe for technological innovation: Does hedge fund activism matter? A fuzzy set qualitative comparative analysis

“…Shareholder activism has been discussed frequently in recent years among professionals, regulators and researchers (Aslan & Kumar, 2016; Brav, Jiang, & Kim, 2015a, 2015b; Jory, Ngo, & Susnjara, 2017; Krishnan, Partnoy, & Thomas, 2016; Norli, Ostergaard, & Schindele, 2014; Wang & Mao, 2015). Hedge funds (HFs) specializing in shareholder activism are emerging as new players in terms of value creation by triggering corporate change and intervening in management decisions (Ben Arfa, Karmani, & Labaronne, 2017; Filatotchev & Dotsenko, 2015).…”