The game of ‘activist’ hedge funds: Cui bono?

Abstract

This article aims to describe the contemporary objectives and tactics of activist hedge funds as well as the actions taken by the targeted companies as a result of their intervention. In this research, we explore the consequences of activism over time (impact on operational performance and share price returns) and compare these with a random sample of firms with similar characteristics at the time of intervention; we also analyse the singularities associated with salient sub-groups of targeted firms. The sample used for our research consists of all 259 firms targeted by activist hedge funds in 2010 and 2011. We found evidence that any improvements in operating performance (return on assets, return on equity, Tobin's Q) result mainly from selling assets, cutting capital expenditures, buying back shares, reduce workforce and other basic financial manoeuvres. Although there is no evidence of deterioration over a 3-year period, the stock's performance of targeted companies over a 3-year span barely matches the performance of a random sample of companies. We found that the best way for activists to make money for their funds is to get the company sold off or substantial assets spun off. If not sold, the hedge fund episode often results for the targeted firms in change of senior management and board members, stagnation of assets and R&D. This research does not provide any evidence of the superior strategic sagacity of hedge fund managers, but does point to their keen understanding of what moves stock prices in the short term.

Activist hedge fund success: The role of reputation

“…However, agreeing to the activist investor's demand may provide short-term gains at the expense of the long-run viability of the firm. Research has shown that hedge fund activism results in significant reductions in the firm's research and development expenditures (Allaire & Dauphin, 2015) as well as increased dividend payouts and reduced cash balances (Clifford, 2008;Klein & Zur, 2009), which reduces the firm's available resources for future capital investments. In addition, a recent study found that hedge fund activism reduces the firm's corporate social responsibility (DesJardine & Durand, in press).…”

“…Many of these demands are aimed at enhancing the firm's short-term stock performance so that the activist can sell its stake and earn a profit (Brav et al, 2008;Coffee & Palia, 2016). These gains, however, are achieved through cuts in expenditures such as research and development (Allaire & Dauphin, 2015;Brav, Jiang, Ma, & Tian, 2018) and increased dividend payouts (Clifford, 2008) with potential adverse consequences for the long-term outlook of the firm. Thus, by avoiding the consequences of a hostile campaign, the board and management may be putting the interests of activist shareholders ahead of the long-term growth and sustainability of the firm and the interests of the firm's other shareholders and constituents.…”

The Opportunistic Principal

“…In the economy, such behaviors occur on different levels. For example, stockholders of public companies regularly act aggressively opposite company CEOs to pursue their dismission, even if this may not be rational (Allaire and Dauphin, , Clayton et al, ; Denes et al, ). Zaardkoohi et al (, 5) suggest that such processes of executive succession may be “one of the manifestations of the principal problem.” Whilst building on the same approach of self‐interest seeking with dominance, principal opportunism within organizations is less easy to detect and less transparent.…”

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

“…US evidence shows a decline in employment after AHF interventions (Brav, Jiang and Kim, 2015). Allaire and Dauphin (2016) report a reduction of around 15% in the workforce of firms targeted by AHFs relative to workforce changes in other firms. DesJardine and Durand (2020) find that AHF interventions are associated with a 4.6% decline in workforce size in the year after the intervention, and 7.7% within the 5-year period.…”