Hedge fund activism corporate governance and firm performance
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Hedge Fund Activism, Corporate Governance, and Firm Performance. Alon Brav , Duke University Wei Jiang , Columbia University Frank Partnoy , University of San Diego Randall Thomas , Vanderbilt University. Shareholder activism. Acquire shares and take actions that increase value.

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Hedge Fund Activism, Corporate Governance, and Firm Performance

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Hedge fund activism corporate governance and firm performance

Hedge Fund Activism, Corporate Governance, and Firm Performance

Alon Brav, Duke University

Wei Jiang, Columbia University

Frank Partnoy, University of San Diego

Randall Thomas, Vanderbilt University


Hedge fund activism corporate governance and firm performance

Shareholder activism

  • Acquire shares and take actions that increase value.

    • Tools: shareholder proposal, media campaign, proxy contest, takeover.

  • Very different from traditional strategy:

    • Identify mispricing, trade accordingly, and passively wait for convergence.

  • Can be denoted as activist arbitrage vs. pure trading arbitrage.

  • Trade off between two strategies has been analyzed theoretically:

    • Bolton & von Thadden (1998), Kahn & Winton (1998), Maug (1998).

Brav, Jiang, Partnoy, and Thomas


What we know about activism

What we know about activism

  • Informed shareholder monitoring can reduce agency problems

    • But collective action problem

  • Non-HF activism positive but insignificant

    • Other agency problems

    • Regulatory/liquidity constraints

  • Why are HFs different?

    • Manager incentives

    • Fewer conflicts of interest

    • Flexibility, unregulated

Brav, Jiang, Partnoy, and Thomas


Goal of the study

Goal of the study

  • Bradly, Brav, Goldstein,and Jiang (2005): the 1st large-sample study on HF activism, but the targets are confined to closed-end funds.

    • Clear identification

    • But CEFs are a small set of publicly traded companies

  • This one: first large-sample study on HF activism in regular corporations:

    • Type of target?

    • Typical strategies?

    • Success?

    • Short-term?

  • In general, does HF activism enhance or destroy shareholder value?

Brav, Jiang, Partnoy, and Thomas


Hedge fund activism corporate governance and firm performance

Data

  • No centralized data base for activist hedge funds.

  • Initial sample started with news search on “hedge fund” and “activism.” All 13D files by these funds are retrieved.

  • More funds recovered from processing the initial funds, and supplemented by people in the business. Retrieve all 13D files by the new funds.

  • Add activist events for the group of funds outside 13D from Spectrum 13F filings and news search.

  • Current sample: 2004-2005; new sample: 2001-2005.

Brav, Jiang, Partnoy, and Thomas


Overview current sample

Overview (current sample)

  • 110 activist hedge funds.

  • 374 hedge fund-target company pairs.

  • 339 unique target companies in 54 SIC two-digit industries.

  • 41.7% (156 cases) of the sample saw aggressive activism launched (beyond “communicating with the managers” on “maximizing shareholder value”).

  • 27% of all the 13D filings involve group of hedge funds.

Brav, Jiang, Partnoy, and Thomas


Stated objective of hedge funds

Stated objective of hedge funds

Brav, Jiang, Partnoy, and Thomas


Activists tactics

Activists’ Tactics

Brav, Jiang, Partnoy, and Thomas


Commitment of capital

Commitment of capital

Brav, Jiang, Partnoy, and Thomas


Length of investment by june 2006

Length of investment (by June 2006)

  • In about 85% of the cases, HFs appear to still hold more than 5%.

  • Spectrum 13Fs reveal equity portfolio annual turnover rates of these funds at the 25th, 50th, and 75th percentile: 29.5%; 55.3%; 82.7%

Brav, Jiang, Partnoy, and Thomas


Characteristics of target companies

Characteristics of target companies

Two methods:

  • Compare the target company to the mean statistics of industry-size-B/M matched firms.

  • Rank each target company within the match group, and calculate the mean ranking/percentile.

Brav, Jiang, Partnoy, and Thomas


Characteristics of target companies1

Characteristics of target companies

Brav, Jiang, Partnoy, and Thomas


Market reaction 5 7 abnormal return

Market reaction: 5-7% abnormal return

Brav, Jiang, Partnoy, and Thomas


Longer term returns in months

Longer-term returns (in months)

Brav, Jiang, Partnoy, and Thomas


Which activism matters

Which activism matters?

Regressing (-20, 20) abnormal returns on stated objective:

  • Strongest response to sale (of the company) and financing related activism.

  • Purely capital structure and governance targeting do not generate abnormal returns.

  • Hostile activism generates stronger market reaction than friendly ones.

Brav, Jiang, Partnoy, and Thomas


Ongoing work effect on operational performance

Ongoing work: Effect on operational performance

Capital structure decisions before and after (relative to matched firms)

Brav, Jiang, Partnoy, and Thomas


Ongoing work

Ongoing work

  • Finishing a complete sample of 130 activist funds, all their 13D filings, and out-of-13D activism in 2001-2005, altogether about 800 events.

  • Analyze the long term effect on target firms.

  • Analyze returns to hedge funds and the life cycle of the activist investment strategy.

  • Model the decision to launch activism.

Brav, Jiang, Partnoy, and Thomas


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