Hedge Fund Activism and Corporate M&A Decisions

Abstract

This paper shows that hedge fund activism is associated with a decrease in mergers and acquisitions (M&A) and offer premiums and an increase in stock and operating performance. Activist hedge funds improve target firms’ M&A performance by reducing poor M&A, diversifying M&A, and the M&A of firms with multiple business segments. Activist hedge funds improve target firms’ M&A decisions by influencing their governance practices. We show that our results are unlikely driven by selection bias. Overall, activist hedge funds play an important role in the market for corporate control by increasing the efficiency of target firms’ M&A activities through interventions. This paper was accepted by Gustavo Manso, finance.

Activism and empire building

“…Our findings are complementary to contemporaneous work by Wu and Chung (2019). Similar to our results, they find that following activism, targeted firms engage in fewer and smaller acquisitions and that investors favorably receive such post-activism acquisitions.…”

“…First, a substantial portion of our analysis focuses on establishing that a firm's acquisition and divestiture behavior is an important determinant of whether it becomes an activist target. In contrast, Wu and Chung (2019) do not consider divestitures or explore whether acquisition and divestiture strategy influences activist targeting. By focusing on both acquisitions and divestitures and by examining their impact on the likelihood of activist intervention, we seek to provide a more complete assessment of how activists curb empire building.…”

How Does Past Experience Impact Hedge Fund Activism?

“…Once targeted, these firms make fewer acquisitions and increase the pace of divestitures relative to non-targeted firms. In a related paper, Wu and Chung (2020) find that targets of activism make fewer but better acquisitions. These authors argue that the presence of a hedge fund activist disciplines target firm management.…”

Institutional Trading Around M&A Announcements

“…Such positive outcomes can be explained by activists' intervention and the disciplinary mechanism imposed on the management of firms subject to activism. and Wu and Chung (2019) also show that hedge fund activism increases shareholder wealth by forcing corporate M&A to be more efficient and disciplined. In contrast, Greenwood and Schor (2009) argue that most of the activism announcement returns are explained by activists' ability to force activism firms into a takeover.…”