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Author: Marco Elia Publisher: ISBN: Category : Finance Languages : en Pages : 104
Book Description
In the first essay, I apply behavioral finance theories to hypothesize one reason why hedge funds choose to engage in activism. Specifically, I predict that if hedge funds see the purchase price of their passive positions as a reference point, then, when they are suffering absolute losses, they are more likely to switch and become activists. I find results consistent with my prediction, even after controlling for the underperformance of the target firms. This study presents new evidence about what causes hedge fund activism. The behavioral finance literature has documented that retail investors, professional traders, and mutual funds are reluctant to realize their losses. I contribute to this literature by showing that a further effect of the loss is to cause activism. The second essay (with Naveen D. Daniel) examines the short-term incentives that activists are facing. The average announcement return to hedge fund activism is around 5%. Thus, activists that want to inflate their reported returns have incentives to initiate activism in target firms before the end of the reporting period. Our contribution is to document that activists engage in such opportunistic activism. Consistent with this, we find that activists are more likely to start their campaigns just before the end of the quarter. This heightened activity cannot be explained by increased news flow at the end of the quarter. In contrast to the typical positive market reaction to activist initiation, reaction to opportunistic activism is virtually zero. This is suggestive of activists initiating campaigns without completing their research on firms, which were potentially targeted for activism in the following quarter. The final essay (with Naveen D. Daniel) investigates how activists are able to be successful despite typically owning a stake of 6-7% in the target firms. We hypothesize that activists have incentives to (implicitly) coordinate with other institutional shareholders and to use this collective firepower to force target firms to change. Our contribution is to document that such coordination is pervasive and is mutually beneficial. In nearly two-thirds of the campaigns, there is coordination between the activist and institutional investors. Coordination is more likely in large firms where the activists would not have sufficient capital to build a large stake. Activist hedge funds that coordinate with other institutional shareholders are more successful in their activism as reflected in higher abnormal returns over the duration of the campaign. We attribute causation by instrumenting for coordination with the geographic proximity between the activist and the institutional investors.
Author: Marco Elia Publisher: ISBN: Category : Finance Languages : en Pages : 104
Book Description
In the first essay, I apply behavioral finance theories to hypothesize one reason why hedge funds choose to engage in activism. Specifically, I predict that if hedge funds see the purchase price of their passive positions as a reference point, then, when they are suffering absolute losses, they are more likely to switch and become activists. I find results consistent with my prediction, even after controlling for the underperformance of the target firms. This study presents new evidence about what causes hedge fund activism. The behavioral finance literature has documented that retail investors, professional traders, and mutual funds are reluctant to realize their losses. I contribute to this literature by showing that a further effect of the loss is to cause activism. The second essay (with Naveen D. Daniel) examines the short-term incentives that activists are facing. The average announcement return to hedge fund activism is around 5%. Thus, activists that want to inflate their reported returns have incentives to initiate activism in target firms before the end of the reporting period. Our contribution is to document that activists engage in such opportunistic activism. Consistent with this, we find that activists are more likely to start their campaigns just before the end of the quarter. This heightened activity cannot be explained by increased news flow at the end of the quarter. In contrast to the typical positive market reaction to activist initiation, reaction to opportunistic activism is virtually zero. This is suggestive of activists initiating campaigns without completing their research on firms, which were potentially targeted for activism in the following quarter. The final essay (with Naveen D. Daniel) investigates how activists are able to be successful despite typically owning a stake of 6-7% in the target firms. We hypothesize that activists have incentives to (implicitly) coordinate with other institutional shareholders and to use this collective firepower to force target firms to change. Our contribution is to document that such coordination is pervasive and is mutually beneficial. In nearly two-thirds of the campaigns, there is coordination between the activist and institutional investors. Coordination is more likely in large firms where the activists would not have sufficient capital to build a large stake. Activist hedge funds that coordinate with other institutional shareholders are more successful in their activism as reflected in higher abnormal returns over the duration of the campaign. We attribute causation by instrumenting for coordination with the geographic proximity between the activist and the institutional investors.
Author: Xianjue Wang Publisher: ISBN: Category : Hedge funds Languages : en Pages : 160
Book Description
The first essay focuses on detailed activities in hedge fund activism targets. We perform a textual analysis of 8-Ks filed by 693 firms targeted by hedge fund activists over the 2005 to 2012 period to document the comprehensive material changes that these firms undergo after being targeted. We benchmark the changes in the year after the 13D filing to those in the year prior to 13D filing, and then control for changes over the same period in propensity score matched firms. The difference-in-differences results suggest that targets of hedge fund activism that are not acquired experience significantly higher incidence of CEO appointments and director arrivals that are both associated with higher shareholder value. The evidence also suggests that some changes that activists request like repurchases, sale of assets and bylaw changes though more frequent are not associated with any value gains. The evidence complements prior work by showing that activists potentially create value through governance changes along with pressurizing the target to sell itself. The second essay investigates the role of institutional investors in hedge fund activism. Hedge funds activists do not usually hold a large stake in the target firm. Institutional owners by their support or lack thereof can have a significant impact on the success of the activist's campaign. We develop three measures of institutional ownership that is likely to be supportive of activism. Over the period 2004 to 2012 we find that high pre event activism friendly institutional ownership is associated with significantly higher short term and long term stock returns and operating performance of the target firm. Pre event ownership by activism friendly institutions also significantly increases the likelihood of being targeted by hedge fund activists. The paper is one of the first to document that composition of institutional ownership has a significant impact on the likelihood of and value created from hedge fund activism.
Author: Sehoon Kim Publisher: ISBN: Category : Corporate governance Languages : en Pages : 168
Book Description
The second chapter studies the effects of hedge fund activism on the activity and efficiency of target companies' internal capital markets. I find that firms targeted by activist hedge funds significantly increase investment cross-subsidies between divisions, predominantly by enhancing the efficiency of their internal resource allocations. Following Schedule 13D filings by activist hedge funds, segment investments of targeted companies become more sensitive to cash flow generated elsewhere in the firm, and this increase in cross-subsidization is primarily driven by the redirection of firm cash flows toward segments with high Tobin's Q. The increases in the activity and efficiency of internal capital markets due to hedge fund activism are unlikely to be driven by measurement errors in Tobin's Q or changes in unobserved correlations across segments.
Author: Ning Pu Publisher: ISBN: Category : Languages : en Pages :
Book Description
Chapter 1 compares and contrasts the activism styles and outcomes of hedge-fund activists versus traditional institutional activists in an attempt to understand what drives the returns of institutional activism. Contrary to the popular belief that hedge-fund activism is designed to achieve a short-term payoff at the expense of long-term profitability, I find some evidence consistent with the hypothesis that hedge-fund activists can be effective monitors, especially when multiple hedge funds collaborate on the monitoring efforts. This result is supported by examining the relations between the holdings by different types of hedge-fund activists and the outcomes of proposed MandA deals, such as acquirer announcement-period CARs, buy-and-hold abnormal returns, acquirer long-run operating performance, means of financing, deal status, and deal attitude. On the other hand, hedge funds that carry out individualistic activism efforts don't appear to exert effective monitoring efforts in the context of MandAs. Concurring with the previous studies on pension-fund activism, this paper finds that traditional institutional activists, as represented by activist pension funds and several activist mutual funds, tend to be effective monitors of MandA acquirers. Additionally, cross-holding analysis of the two groups of institutional activists (hedge funds vs. non-hedge funds) provides further evidence corroborative of the hypothesis that cross-holding activists who realize gains in both acquirers and targets tend to be effective monitors at the first place. Chapter 2 examines an expanded version of acquisition probability hypothesis proposed by Song and Walkling (2000). In contrast to the previous papers that find positive rival announcement-period abnormal returns, I find only rivals associated with value-creating deals experience positive announcement-period abnormal returns. In addition to studying the announcement-period abnormal returns, I also analyze the extent of impact on rivals around deal terminations and deal completions. The results show that rivals that experience higher announcement-period abnormal returns also tend to experience higher termination-period and completion-period returns, consistent with the predictions of the acquisition probability hypothesis. More direct tests of the hypothesis confirm that the rival announcement-period CARs are positively and significantly associated with the predicted probability of rivals becoming subsequent targets, and thus providing direct evidence corroborative of the acquisition probability hypothesis. Chapter 3 studies the impact of CalPERS Focus List (CFL) program have on bondholders' wealth. In contrast to the extant research documenting positive abnormal returns to shareholders of the firms subject to pension fund activism, I find that CalPERS Focus List (CFL) program significantly reduces existing bondholders' wealth. In the year subsequent to the releases of CalPERS' Focus List, 57% of outstanding bonds of target firms underwent downgrade. Additionally, I find evidence of an expropriation of wealth from the bondholder to the shareholder based on long-horizon analysis. The source of wealth transfer from bondholders to stockholders appear to come from rapid asset sales of the CFL firms following the targeting.
Author: Pil-Seng Lee Publisher: ISBN: Category : Culture Languages : en Pages : 0
Book Description
This dissertation has two essays covering hedge fund activism and family firm. In the first essay of my dissertation, I investigate how hedge fund activism reengineer corporate culture of targeted firms. By using culture measures based on the Q&A section of earnings conference calls, I find that target firms emphasize building organizational culture with better quality, more innovation, higher integrity, and growing respect after activism. However, teamwork culture does not change. I also find that these positive effects of activism on corporate culture are mainly driven by CEO turnover, especially if incumbent CEOs are replaced by outsiders, not insiders. New outside CEOs are recruited from firms with better culture and higher asset sales. Activist-appointed directors also influence corporate culture by promoting outside CEO turnover. Target firms with positive cultural change improve their firm performance. Additionally, employees of target firms perceive their firms’ culture as improved after activism. Overall, this study provides evidence of the importance of corporate culture as a source of gains from hedge fund activism. The second essay examines the extent to which founder-CEOs pay attention to stock market signals in making their investment decisions. We find that founder-CEOs, on average, place significantly less weight on market signals than professional CEOs, without compromising investment efficiency and firm performance. We employ decimalization as an exogenous shock to show that the market premium due to enhanced liquidity is lower for founder-CEO firms, consistent with founder-CEOs underweighting the incremental information provided by a more liquid market. Further, we find that the weaker learning behavior is more prominent if founder-CEOs possess more specialized skills and operate firms with higher R&D intensity and greater operating cash flow volatility. We argue that founder-CEOs’ superior skills and longer-term investment horizons drive this result. Price informativeness, CEO power, external monitoring, financing constraints, and overconfidence do not seem to drive our findings.
Author: Yifei Zhang Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
The first chapter studies whether and how corporate venture capital (CVC) spurs changes in firm scope. Using two sets of firm scope metrics, a text-based emerging business measure and Compustat segment measures, I document that CVC investments are strongly associated with subsequent firm scope changes of the CVC corporate parent, including seeding emerging businesses, establishing new divisions, terminating obsolete divisions, and changing the primary industry. Further evidence is consistent with an experimentation view of CVC investments, with more promising ventures having a stronger impact on scope changes of parent firms. Finally, to sharpen the causality, I explore idiosyncratic fund inflow shocks of those connected independent VCs for each CVC program, as well as the US non-stop airline routes.In the second chapter, we investigate the impact of hedge fund activism on corporate transaction markets. We find that activism targets as well as firms exposed to hedge fund threats receive more merger bids, increase divestitures and make fewer acquisitions, with the acquisition effect concentrated among large firms. We document that the majority of activist campaigns are clustered by industry, and estimate that the simultaneous increase in asset sales and decrease in acquisitions in such activism clusters reduce real asset liquidity for asset sellers by about 35%. The liquidity squeeze produces two effects: transaction prices are reduced, and industry outsiders provide liquidity by purchasing more industry assets. Looking at short-term price pressure and long-run performance, we present evidence that transactions by activist targets are less affected by the reduced asset liquidity than those of other firms.The third chapter investigates which kind of targeted firms benefit the most from hedge fund activism campaigns. I first document that ex-ante better governance firms experience larger value and performance improvements after activism campaigns. Moreover, good governance firms operating in relatively competitive industries benefit the most from hedge fund activism campaigns among all targeted firms. Both results are counter-intuitive since ex-ante good governance firms operating in relatively competitive industries should suffer the least from agency costs and have already operated on the industry efficiency frontier. As a result, further value improvements should be minimal. I provide a new explanation for the puzzling results through the success likelihood of activist campaigns and value improvement conditional on campaign success.
Author: Tanja Katharina Kirmse Publisher: ISBN: Category : Corporate governance Languages : en Pages : 0
Book Description
Observing information acquisition by various market participants can yield valuable insights into the goals and strategies of investors, firms, and regulators. My dissertation uses a unique dataset, which captures 'clicks' on companies' SEC filings, to answer three questions related to hedge fund activism. First, I use activist hedge funds' views of SEC filings to proxy for negotiations between those activists and firms. I find that negotiations are common and associated with governance changes. The second essay examines the reactions of firms to elevated activist hedge fund interest. We find that firms use shareholder rights plans ('poison pills') in an effort to discourage activists' share accumulation, and that such plans are successful at decreasing the probability 13D and DEF14A filings. Finally, hedge fund activism does not occur in isolation. The third essay examines spillover effects of hedge fund activism on the emissions of the target's peer firms. We find that while hedge fund activism targets decrease their emissions, their peers increase emissions, effectively negating the direct effect. This finding is particularly strong when peers are less likely to be subject to enforcement, and face more competitive pressures. Essay 1: A portion of hedge funds' engagement can be observed through their votes and regulatory filings. However, much of their communication occurs through direct interaction with management, which is not formally recorded. I use SEC EDGAR log file data to proxy for such engagements. This proxy indeed captures hedge fund interest: one hedge fund click more than doubles the probability of an activism event. Moreover, consistent with hedge fund clicks proxying for behind-the-scenes engagement, these clicks predict corporate governance changes, for example CEO and director turnover, even in the absence of a formal activist filing. I estimate that private activism constitutes at least 31% of all hedge fund activism, and potentially as much as 89%. Private activism is particularly likely when boards have more bargaining power, as proxied by a classified board or dual class share structure, and when directors have higher reputational concerns, as proxied by these individuals having more outside board seats. Essay 2: We provide the first systematic evidence of contractual innovation in the terms of poison pill plans. In response to the increase in hedge fund activism, pills have changed to include anti-activist provisions, such as low trigger thresholds and acting-in-concert provisions. Using unique data on hedge fund views of SEC filings as a proxy for the threat of activists' interventions, we show that hedge fund interest predicts pill adoptions. Moreover, the likelihood of a 13D filing declines after firms adopt "anti-activist" pills, suggesting that pills are effective in deterring activists. The results are particularly strong for "NOL" pills that, due to tax laws, have a five percent trigger. Our analysis has implications for understanding the modern dynamics of market discipline of managers in public corporations and evaluating policies that regulate defensive tactics. Essay 3: Existing research shows that hedge fund activism decreases target firms' emissions. However, we document a negative spillover effect from hedge fund activism: hedge fund activism leads to a 1.1 percent increase in emissions by industry rivals. Evidence suggests that the increase in emissions stems from a reduction in environmentally friendly practices rather than a drop in production. The increase is larger for rival firms closer to default, with low profitability, and those operating in a competitive environment. Collectively, these results are consistent with a product market channel, where industry rivals cut environmental expenditure to compete against a more efficient target firm. Accounting for this spillover effect, an additional activism campaign, on average, leads to an increase in emissions of 135 thousand pounds at the industry level, or 0.75 percent increased emissions. Overall, our findings highlight the importance of considering spillover effects when evaluating how shareholder activism affects other stakeholders.
Author: Marco Elia
Author: Marco Elia
Author: Xianjue Wang
Author: Alon Brav
Author: Sehoon Kim
Author: Ning Pu
Author: Pil-Seng Lee
Author: Hyuna Park
Author: Yifei Zhang
Author: Tanja Katharina Kirmse
Author: Anna Slavutskaya