The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance

Abstract Hedge fund activism has been identified in the USA as a driver of enduring corporate governance change and market perception. We investigate this claim in an empirical study to see whether activism produced similar results in Japan in four representative areas: management effectiveness, managerial decisions, labour management and market perception. Experience from the USA would predict positive changes at Japanese target companies in these four areas. However, analysis of financial data shows that no enduring changes were apparent in the first three areas, and that market perception was consistently unfavourable. Our findings demonstrate that the same pressures need not produce the same results in different markets. Moreover, while the effects of the global financial crisis should not be ignored, we conclude that the country-level differences in corporate governance identified in the varieties of capitalism literature are robust, at least in the short term.

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Hedge Fund Activism vs Other Activist Investors

10.1093/oxfordhb/9780198840954.013.8 ◽

2021 ◽

pp. 252-282

Author(s):

Ulf von Lilienfeld-Toal ◽

Jan Schnitzler

Keyword(s):

Empirical Analysis ◽

Hedge Funds ◽

Hedge Fund ◽

Empirical Literature ◽

Comparative Approach ◽

Large Sample ◽

Shareholder Proposals ◽

Target Firms ◽

Hedge Fund Activism ◽

The Impact

This chapter reviews the growing empirical literature on shareholder activism by hedge funds. The aim is a comparative approach contrasting the impact of hedge fund activism on target firms with outcomes for other types of activist investors. Following recent research, the chapter provides an empirical analysis based on the disclosure of equity blockholdings by activist investors in a large sample of all US listed companies. In addition, it summarizes which types of investors engage in other events linked to activism, such as takeovers, proxy contests, or shareholder proposals. Overall, there is evidence that not only hedge funds but also other types of investors can be effective monitors, but there are nuanced differences with respect to targeting decisions and payout policies.

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The impact of hedge fund activism on target firm performance, executive compensation and executive wealth

Journal of Governance and Regulation ◽

10.22495/jgr_v6_i3_p2 ◽

2017 ◽

Vol 6 (3) ◽

pp. 14-28 ◽

Cited By ~ 2

Author(s):

Andrew Carrothers

Keyword(s):

Firm Performance ◽

Executive Compensation ◽

Firm Value ◽

Hedge Fund ◽

Share Price ◽

Target Firm ◽

Increased Risk ◽

Target Firms ◽

Hedge Fund Activism ◽

The Impact

This paper examines the relationship between hedge fund activism and target firm performance, executive compensation, and executive wealth. It introduces a theoretical framework that describes the activism process as a sequence of discrete decisions. The methodology uses regression analysis on a matched sample based on firm size, industry, and market-to-book ratio. All regressions control for industry and year fixed effects. Schedule 13D Securities and Exchange Commission (SEC) filings are the source for the statistical sample of hedge fund target firms. I supplement that data with target firm financial, operating, and share price information from the CRSP-COMPUSTAT merged database. Activist hedge funds target undervalued or underperforming firms with high profitability and cash flows. They do not avoid firms with powerful CEOs. Leverage, executive compensation, pay for performance and CEO turnover increase at target firms after the arrival of the activist hedge fund. Target firm executives’ wealth is more sensitive to changes in share price after hedge fund activism events suggesting that the executive team experiences changes to their compensation structure that provides incentive to take action to improve returns to shareholders. The top executives reap rewards for increasing firm value but not for increased risk taking.

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