External Monitoring and Returns to Hedge Fund Activist Campaigns

60 Pages Posted: 17 Aug 2016 Last revised: 24 Jun 2019

See all articles by Ryan Flugum

Ryan Flugum

University of Northern Iowa

Matthew E. Souther

University of South Carolina - Darla Moore School of Business

Date Written: June 20, 2019

Abstract

Firms targeted by hedge fund activists experience significantly higher returns when there are fewer external monitors in place at the target firm. Using analyst coverage and institutional ownership as measures of external monitoring presence, we find that low-monitored activist targets experience abnormal returns 17.52% above that of high-monitored targets in the two-year period following the initial campaign start date. The significant effect of external monitoring remains after controlling for target firm and activist characteristics. We also document improved operating performance and an increased monitoring presence at low-monitored target firms across the same two-year period, consistent with the observed market performance.

Keywords: Hedge Fund Activism, Analyst Coverage, Institutional Ownership

JEL Classification: G3, G23, G34

Suggested Citation

Flugum, Ryan and Souther, Matthew, External Monitoring and Returns to Hedge Fund Activist Campaigns (June 20, 2019). Review of Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2823676 or http://dx.doi.org/10.2139/ssrn.2823676

Ryan Flugum (Contact Author)

University of Northern Iowa ( email )

Cedar Falls, IA 50614
United States
3192732976 (Phone)

Matthew Souther

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

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