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Over the past 20 years, hedge fund activism has become a powerful mechanism for influencing companies. Regulators, the business community, and the popular press debate whether activism enacts meaningful change or whether it is tactic for hedge funds to earn short-run profits. Several academic studies find long-run positive stock returns and operating improvements following activist interventions, and conclude that hedge fund activism is beneficial for shareholders.

Our study extends and challenges this prior literature in two ways. First, like prior research, we find significantly positive short-term and long-term returns to activism announcements. However, we find the long-run returns are concentrated in the smallest 20 percent of targets with an average market value of $22 million. For the remaining 80 percent of firms, we find the positive short-run returns reverse within 3 months of the announcement to become insignificantly negative. These results fail to find that the typical investor experiences long-term wealth gains from hedge fund activism. Rather, long-term gains are concentrated in small firms that compose only a tiny franction of the U.S. market capitalization.

Additionally, we challenge prior research that documents significant improvements in operating performance following hedge fund activism. We find target firms have unusual deteriorations in profitability prior to activist interventions. After controlling for this unusual decline, we find no evidence of long-term improvements in a broad set of accounting-based metrics. Like our returns tests, these results provide largely neutral view of hedge fund activism.

With little evidence that target companies become more profitable or efficient with hedge fund activism, our final set of analyses examine which aspects of activism do produce positive returns. We consider outcomes that hedge fund activists commonly lobby for, including: buyouts, large assets sales that can result from a carve out or spin-off, CEO removal for poor performance, board of directors turnover, and increased payouts to shareholders. While many of these outcomes are commonly cited by activists as ways to improve companies, we fail to find evidence that they drive long-term stock returns. Instead, we find the long-run returns following activist interventions are concentrated in those targets which are sold within two years of targeting.

Our paper provides important insights into the efficacy of hedge fund activism. Our findings do not strongly support arguments that activist interventions drive long-term wealth for the average investor. We also do not observe operational improvements in these target companies. At the same time, we do not find evidence that activist interventions destroy value or stymie operations, so we also fail to find evidence consistent with critics’ assessments of activism. Our study provides a more nuanced view of hedge fund activism—it appears that it is only beneficial for small targets that are immaterial from a market perspective.

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