Shareholder altruism or corporate piracy? - Operational performance of companies targeted by activist hedge funds

Sammanfattning: In this study, the operational performance of companies subject to hedge fund activism is investigated. We study 689 companies in the Unites States and Europe between 2000-2015 and find that companies targeted by activist hedge funds outperform their control firms with regard to appreciation in valuation and capital efficiency, e.g. return on assets. In more detail, we observe an appreciation in valuation during the holding period whereas a lagging outperformance in return on assets is observed following the exit of the activist hedge fund. The outperformance in return on assets, in turn, is driven by an outperformance in asset turnover. As a result, capital optimization is concluded to be an important channel that activist hedge funds generate value through. A second contribution is that we study the jurisdictional differences in operating performance in companies subject to hedge fund activism. In short, we find no substantial differences between the United States and Europe. Lastly, we provide a potential explanation for the observed outperformance in asset turnover. That is, the structure of activist hedge funds allows for shareholder activism, but it also limits them to focus on more generic company problems, such as improving asset turnover, rather than performing holistic corporate restructuring. All in all, the study suggests that activist hedge funds catalyze change in the target companies, implying that monitoring performed by shareholders under certain circumstances serve a purpose on public markets, even through non-controlling block holdings.