Shareholder activists are often accused of having short investment horizons and thus pushing companies to increase their stock prices at the expense of long-term shareholder value (“short-termism”). These accusations have prompted extensive research on interventions by hedge funds. In a survey of thirty years of such research, Denes et al. (2017) nevertheless conclude that the issue is still not settled. In a recent study, we use a very different sample of activists and targeted firms from prior research to shed new light on this issue. Drawing on several sources of information, we develop a 2 ..read more

In a new paper, I add to the debate over hedge fund regulation by introducing empirical evidence that hedge fund registration requirements reduce misreporting. Using three alternating changes in hedge fund regulation, my study finds consistent evidence that registration reduces hedge funds’ misreporting — and provides evidence on why this regulatory regime is effective. In particular, my analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund’s auditor, and that these changes induced funds to report their f ..read more

Hedge fund activism has generated a large amount of public debate. On one side, the hedge fund activists and their academic cheerleaders argue that hedge fund activism is good for shareholders and society at large. On the other side, potential target companies, their law firms, politicians, and commentators (including academics and judges) blame it for undermining companies and long-term investment. Yet a decade’s worth of research shows that neither side is right. Up to the mid-2000s, there was little persuasive evidence that shareholder activism generates any economically meaningful improvem ..read more

A hot topic in corporate governance is the so-called short-termism of publicly held companies. In response to actual and anticipated pressure from activist hedge funds, companies are, some say, focusing too much on short-term gains by, for instance, shunning research and development. This behavior undermines long-term value at the expense of shareholders and society, the argument goes. The opposing view is that the pressure to perform is necessary to keep management on its toes. Both camps seem to have a point. In our recent paper, we argue that  whether short-termism is a problem in gene ..read more

Regardless of industry, size or performance, no company should consider itself immune from hedge fund activism.  No company is too large, too popular, too new or too successful.  Even companies that are respected industry leaders and have outperformed the market and their peers have come under fire.  Activists set new records in 2018, targeting the largest number of companies (nearly 300), deploying more capital and winning a greater number of board seats (161) than ever before. Campaigns by the most well-known activist hedge funds are surging, and there are more than 100 hedge ..read more

What is the opportunity cost of private benefits of control? Using dollar cost of corporate giving to measure private benefits of control, we show in a recent study that (i) the consumption of private benefits creates a managerial aversion to new external financing due to the threat of enhanced scrutiny from external capital providers and (ii) this aversion to external financing leads to non-optimal corporate investment decisions. In addition, we provide new evidence that these investment distortions reduce shareholder wealth. One implication of Jensen’s (1986) free cash flow view of the manag ..read more

The rise of shareholder activism, and its recent international expansion, have led researchers to look at many aspects of hedge fund activism. Academic papers have almost exclusively focused on the effects on firms targeted in activist campaigns. But the intense and sustained presence of hedge fund activists in many industries and markets makes it likely that activism produces effects beyond those on activism target firms. The real effects of activism on other firms, stakeholders, institutions, and markets remain largely unexplored. Our paper attempts to make headway in this direction by explo ..read more

A number of recent news stories have recounted the quick and dramatic changes that activist hedge funds trigger in the companies they target. In the Atlantic magazine, for example, a 2016 article describes DuPont’s decision to cut 10 percent of its workforce in response to an activist campaign by investor Nelson Peltz and his company Trian Fund Management. The recent saga involving David Loeb’s Third Point hedge fund and Campbell Soup illustrates the typical pattern where activist investors take a small but meaningful stake in a target company and demand significant say over the strategic and ..read more

October 2018 ended with the hedge fund industry suffering its worst monthly decline since September 2011, according to the HFRI Fund Weighted Composite Index. Some commentators are predicting that 2018 will end with the hedge fund industry experiencing its worst annual performance since the failure of Lehman in 2008. This news comes on the heels of a disastrous decade for hedge fund performance. In the years following the financial crisis of 2007-2009, the S&P 500 consistently outperformed the hedge fund industry. Even Warren Buffet famously predicted that a basket of hedge funds would und ..read more

Our new academic study examines the long-term effects of interventions by activist hedge funds. Prior studies document positive equal-weighted long-term returns and operating performance improvements following activist interventions, and typically conclude that activism is beneficial to shareholders. We challenge and extend prior literature in two ways. First, we find that equal-weighted long-term returns are driven by the smallest 20 percent of firms with an average market value of $22 million. The largest 80 percent of firms experience insignificant negative long-term returns. On a value-wei ..read more