The Preventive Effect of Hedge Fund Activism

55 Pages Posted: 20 Dec 2013 Last revised: 21 Jan 2014

Date Written: November 1, 2013

Abstract

This paper examines the effectiveness of hedge fund activism in preventing corporate policy deviations. Whereas previous studies focus on policy changes in target firms after intervention, I examine proactive policy changes in all firms that face a threat of intervention. Using mutual fund fire sales as an instrument, I find that an increase in intervention likelihood leads to increases in shareholder distribution as well as decreases in CEO pay, cash, and investments. Given the reduction in managerial rent seeking, cash hoarding and empire building behaviors, it is unsurprising that operating performance as measured by ROA also improves significantly. The relationships are causal, significant, and robust to a variety of alternative model specifications and sample divisions. The results suggest the existence of a preventive effect of hedge fund activism as well as a stronger and broader impact of hedge fund activism on corporate policy than previously documented.

Keywords: Hedge fund intervention, Corporate takeover, Corporate governance

JEL Classification: G23, G34

Suggested Citation

Zhu, Caroline, The Preventive Effect of Hedge Fund Activism (November 1, 2013). Available at SSRN: https://ssrn.com/abstract=2369533 or http://dx.doi.org/10.2139/ssrn.2369533

Caroline Zhu (Contact Author)

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

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