Brav, Jiang, Partnoy, and Thomas seek to answer the two questions below in their analysis using an updated empirical analysis from an extended sample of 11,602 13D filings that covers US activist events from 2001 – 2007:
1. What is the nature of activist hedge funds’ intervention in target firms? and
2. Does hedge fund activism create value for shareholders in the target firms and investors in the hedge funds?
The authors note that activist hedge funds tend to target “value” firms that have low valuations compared to “fundamentals”. The authors discern five main investment objectives that activist state in their 13D filings:
1. General undervaluation / maximize shareholder value
2. Capital structure
3. Business strategy
4. Sale of target …show more content…
Targets can be characterized as “cash cows” with low growth potential that may suffer from the agency problem of free cash flow.
Target firms for activists also exhibit high trading liquidity, institutional ownership, and analyst coverage. This trading liquidity allows an activist to purchase a large stake in a company without significant price changes and allows the activist to spread their agenda to large institutional shareholders to try and garner support. Finally, the authors argue that activists target weakly governed firms that have poor shareholder rights where the potential for value enhancement is greater.
Tactics for intervention that activist hedge funds employ in their target companies vary depending on the event. The paper identifies seven of the most common activist tactics and ranks them according to frequency:
1. The hedge fund intends to communicate with the board/management on a regular basis with the goal of enhancing shareholder value
2. The activist hedge fund seeks board representation without a proxy contest or confrontation with the existing management /
1. What is the nature of activist hedge funds’ intervention in target firms? and
2. Does hedge fund activism create value for shareholders in the target firms and investors in the hedge funds?
The authors note that activist hedge funds tend to target “value” firms that have low valuations compared to “fundamentals”. The authors discern five main investment objectives that activist state in their 13D filings:
1. General undervaluation / maximize shareholder value
2. Capital structure
3. Business strategy
4. Sale of target …show more content…
Targets can be characterized as “cash cows” with low growth potential that may suffer from the agency problem of free cash flow.
Target firms for activists also exhibit high trading liquidity, institutional ownership, and analyst coverage. This trading liquidity allows an activist to purchase a large stake in a company without significant price changes and allows the activist to spread their agenda to large institutional shareholders to try and garner support. Finally, the authors argue that activists target weakly governed firms that have poor shareholder rights where the potential for value enhancement is greater.
Tactics for intervention that activist hedge funds employ in their target companies vary depending on the event. The paper identifies seven of the most common activist tactics and ranks them according to frequency:
1. The hedge fund intends to communicate with the board/management on a regular basis with the goal of enhancing shareholder value
2. The activist hedge fund seeks board representation without a proxy contest or confrontation with the existing management /