hedge fund activism, corporate governance, and firm performance alon brav, duke university wei...

Hedge Fund Activism, Corporate Governance, and Firm Performance

Alon Brav, Duke UniversityWei Jiang, Columbia UniversityFrank Partnoy, University of San DiegoRandall Thomas, Vanderbilt University

Brav, Jiang, Partnoy, and Thomas 22006

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).

Shareholder 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


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?


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.


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.


Stated objective of hedge funds

34.6%39.1% 39.7%

62.2%

4.5%

29.50%33.15%

30.95%

36.48%

70.91%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Capital Structure Business Strategy Sale of the TargetCompany

Governance Financing/Turnaround

% of all activist events average success rate


Activists’ Tactics

52%

17%

26%

8%

16%

8%6%

0%

10%

20%

30%

40%

50%

60%

Comm. withMgr

Seek boardrep. w/ocontest

Publicletter/SHproposal

Threat ofcontest/law

suit

Proxy contest Litigation Takeoverattempt


Commitment of capital

0.7 3.8 13.840.7

222.3

2.3 9.223.9

84.0

391.7

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

5% 25% 50% 75% 95%

Percentile of Sample Events

$ M

illio

n

Nonaggressive Aggressive


Length of investment (by June 2006)

0

200

400

600

800

1000

1200

1400

5% 25% 50% 75% 95%

Percentile

Day

s fr

om

13D

to

Bel

ow

5%

Non-Aggressive Aggressive

• 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%


Characteristics of target companies

Two methods:

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

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


Characteristics of target companies

Dif w/ Match t-statAvg

Percentile

Mkt Cap -628 -5.28 0.51

Book to Mkt 0.148 4.90 0.59

Growth -0.018 -1.20 0.49

ROA 0.048 5.83 0.60

Cash Flows 0.035 3.89 0.55

LEV (Debt/Cap) 0.039 2.47 0.53

CASH -0.037 -3.65 0.48

DIV YLD -0.004 -4.46 0.46

R&D -0.029 -3.99 0.39

HERFINDAHL -0.033 -2.26 0.47

GINDEX 0.707 3.38 0.57

%INSTITUTION 0.122 8.04 0.64


Market reaction: 5-7% abnormal return

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

Days relative to the 13D Date

Cu

mu

lati

ve

Ex

ce

ss

Bu

y-a

nd

-Ho

ld R

etu

rn


Longer-term returns (in months)

0.85

0.9

0.95

1

1.05

1.1

t-24

t-22

t-20

t-18

t-16

t-14

t-12

t-10 t-8 t-6 t-4 t-2

Event t+

2t+

4t+

6t+

8t+

10t+

12

Months relative to Event

All 13D Activism


Which activism matters?

coef t-statistic

ln(MV) -0.003 -0.230

General 0.055 3.764

CapStructure 0.000 0.001

BusStrategy 0.059 2.567

Sale 0.104 4.865

Gov -0.005 -0.296

Financing 0.168 2.592

• 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.

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


Ongoing work: Effect on operational performance

-0.2

0.0

0.2

0.4

0.6

0.8

t-3 t-2 t-1 13D Year t+1

Pc

t P

oin

t D

iffe

ren

ce

to

Ma

tch

ed

F

irm

s

0.0

1.0

2.0

3.0

4.0

5.0

TOTPAYOUT (left) LEV (Right)

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


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.

hedge fund activism, corporate governance, and firm performance alon brav, duke university wei...

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