hedge fund activism, corporate governance, and firm.pdf

THE JOURNAL OF FINANCE • VOL. LXIII, NO. 4 • AUGUST 2008 Hedge Fund Activism, Corporate Governance, and Firm Performance ALON BRAV, WEI JIANG, FRANK PARTNOY, and RANDALL THOMAS∗ ABSTRACT Using a large hand-collected data set from 2001 to 2006, we find that activist hedge funds in the United States propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subse- quent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring. ALTHOUGH HEDGE FUND ACTIVISM IS WIDELY discussed and fundamentally important, it remains poorly understood. Much of the commentary on hedge fund activism is based on supposition or anecdotal evidence. Critics and regulators question whether hedge fund activism benefits shareholders, while numerous commen- tators claim that hedge fund activists destroy value by distracting managers from long-term projects. However, there is a dearth of large-sample evidence about hedge fund activism, and existing samples are plagued by various biases. ∗We thank the Acting Editor who handled our submission. Brav is with Duke University, Jiang is with Columbia University, Partnoy is with University of San Diego, and Thomas is with Van- derbilt University. The authors have benefited from discussions with Patrick Bolton, Bill Bratton, Martijn Cremers, Gregory Dyra, Alex Edmans, Allen Ferrell, Gur Huberman, Joe Mason, Edward Rock, Mark Roe, Roberta Romano, Tano Santos, William Spitz, Robert Thompson, and G