ANALYZING THE EFFECTS OF HEDGE FUND ACTIVISM AFTER THE 2008 FINANCIAL CRISIS

Abstract

Shareholder activism—in which certain shareholders voice their opinions regarding corporate policy to a company’s board and management—has been practiced by different types of investors since the 1940s. Recently, academic literature has focused on analyzing hedge fund activists because their fee structure and lack of regulation incentivize them to engage in activism. Studies have shown that hedge fund activism generates positive cumulative abnormal returns (CARs) for the targeted firm. So far, no study has examined whether CARs generated from hedge fund activism differ after the 2008 financial crisis. Research has shown that financial crises cause investors to be more risk-averse with respect to the stock market (Malmendier & Nagel, 2011). This paper assesses whether the change in investor preferences after the 2008 financial crisis impacts CARs generated from hedge fund activism. This paper improves upon the methodology used by previous research by using individual-firm regressions to estimate CARs and by using the Standardized Cross-Sectional Test (SCST) to test for statistical significance. Results using data from 2005-2012 show that hedge fund activism generated approximately 4% CARs in the [-5 days, 5 days] event window when activism news appears, 5% CARS in the [-10 days, 10 days] window, and 8% CARs in the [-20 days, 20 days] window on average. No statistically significant differences are found between CARs pre-2008 and CARs post-2009 that are consistent across different specifications. The methodology employed in the current study improves upon previous methods used to study hedge fund activism and lays the groundwork for future studies.