HEDGE FUND ACTIVISM: IMPACT ON FINANCIAL MARKETS

Abstract

This thesis is an attempt to contribute towards the ongoing debate about the long-term impact of hedge fund activism. Hedge fund activism has been on a rampage in recent times, with activists turning up the heat in their quest to improve corporate governance. While existing studies have examined the ability of hedge fund activists to create value, most of these studies analyse the stock market reaction to activist engagements. Furthermore, few studies have examined the long-term impact of hedge fund activism. Even fewer studies have compared the ability of hedge fund activists to create value to the ability of other shareholder activists such as mutual funds and pension funds. Using a comprehensive hand-collected database of activist campaigns from 1994 to 2016, this thesis aims to contribute to the existing literature on hedge fund activism by analysing the long-term impact of hedge fund activism as well as by testing the efficiency of hedge fund activists compared to other shareholder activists. The findings of this thesis suggest that while there was limited evidence of a positive long-term impact of hedge fund activist-initiated takeovers, activist hedge funds were more than capable of playing the long-term game by increasing managerial focus through corporate divestitures. Furthermore, there was no evidence of activist hedge funds destroying value of either their target firms or the financial markets by employing derivatives, though they were more effective without employing derivatives. Finally, hedge fund activists are more efficient compared to other shareholder activists in creating long-term value to their target firms. Overall, the findings of this thesis urge other shareholder activists to collaborate with activist hedge funds rather than undertaking their own activist engagements, which has now been found out to be value destroying. It also urges policymakers to evaluate their goals, while seeking to regulate activist hedge funds.