The Returns to Hedge Fund Activism in Germany

Abstract

Recent regulatory changes in the German financial system shifted corporate control activities from universal banks to other capital market participants. Particularly hedge funds took advantage of the resulting control vacuum by acquiring stakes in weakly governed and less profitable firms. We document that, on average, hedge funds increased shareholder value in the short‐ and long‐run. However, more aggressive hedge funds generated only initially higher returns and their outperformance quickly reversed, whereas non‐aggressive hedge funds ultimately outperformed their aggressive peers. These findings suggest that aggressive hedge funds attempt to expropriate the target firm's shareholders by exiting at temporarily increased share prices.

Thirty years of shareholder activism: A survey of empirical research

“…Krishnan, Partnoy, and Thomas (2015) also report positive stock returns around announcements of hedge fund activism, but they do not report test statistics for their overall sample. These results focus on U.S. firms, but they are similar to findings regarding hedge fund activism in the U.K. (Becht et al, 2010), Japan (Hamao, Kutsana, and Matos, 2011), and Germany (Bessler et al, 2015). Becht, Franks, Grant, and Wagner (2015) examine both U.S. and non-U.S. hedge fund activism and report fairly uniform results.…”

Equity Issues and Stock Repurchases of Initial Public Offerings

“…A higher value indicates a more concentrated ownership and a higher incentive to play an active role within the firm. Institutional investors : The variable Institutional is the combined percentage owned by institutional investors. Mutual funds, pension funds, and hedge funds are often dominant shareholders that monitor managers and contribute to a firm's superior corporate governance policy (Bessler et al ., ). Dividend: Dividend is a dummy variable that takes the value of 1 if the IPO firm paid a dividend in the last fiscal year prior to the event, and zero otherwise. Dividends and share repurchases are principally substitutes for distributing cash to shareholders (Grullon and Michaely, ), thus it is important to control for dividends when analysing SRPs.…”

“…Bessler et al . () compare SRPs for established firms and IPOs and report significant differences in valuation effects and performance. For the period from 1998 to 2008, they document significantly higher announcement returns for IPOs but subsequently an inferior long‐run performance.…”

The listing and delisting of German firms on NYSE and NASDAQ: Were there any benefits?

“…As a result, banks and other large blockholders were incentivized to reduce their substantial equity holdings in German corporations. Bank ownership was often replaced by hedge funds and other investors that focused managerial attention on shareholder concerns more commonly associated with Anglo-American governance structures (Bessler et al, 2011). Weber (2009) argues that this change caused the management to change their focus from generating insider-oriented private benefits to maximizing shareholder value, thus reducing the bonding benefits previously associated with cross listing for German firms.…”