Activist Investing and Hedge Fund Clout: The Impact of Past Results on New Campaigns

Abstract

Advantaged by their unique structure and regulatory status, hedge funds have increasingly sought to use the voting power of their equity investments in order to influence the operations of their targets and unlock value for themselves and their fellow shareholders. While many previous studies have focused on the characteristics of the target firm, I propose that the abnormal returns surrounding an activist event are strongly and positively influenced by the reputation for success of the initiating activist. In this empirical study, I rely on a manually-collected data set of 920 activist campaigns initiated by hedge funds between 2009 and 2016 to test this relationship. I find that for every successful campaign initiated by the hedge fund in the last three years, a new campaign is predicted to generate 0.8 percent greater abnormal returns in the 61-day window surrounding the announcement of a new campaign. Different measurement windows for both the successful reputation and the new campaign returns yield positive impacts of similar magnitude. These results imply that boards of directors, who have fiduciary responsibilities to their larger shareholder groups, should recognize that not all activism is the same and act to encourage interest from those activists that have developed strong track records of success.