Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors

We examine recent confrontational activism campaigns by hedge funds and other private investors. The main parallels between the groups are a significantly positive market reaction for the target firm around the initial Schedule 13D filing date, significantly positive returns over the subsequent year, and the activist’s high success rate in achieving its original objective. Further, both activists frequently gain board representation through real or threatened proxy solicitations. Two major differences are that hedge funds target more profitable firms than other activists, and hedge funds address cash flow agency costs whereas other private investors change the target’s investment strategies. *Both authors are from the Stern School of Business, New York University. An earlier version of this paper was circulated under the title “Hedge Fund Activism.” The authors thank two anonymous referees, Yakov Amihud, Stephen Brown, Julian Franks, Jeffrey Gordon, Baruch Lev, Christine Petrovits, Nitzan Shilon, Richard Taffler, and seminar participants at Columbia Law School, Lehigh University, the University of Edinburgh, New York University, the London Business School, the 2007 Conference on Empirical Legal Issues at the University of Texas – Austin, the Amsterdam Conference on Hedge Fund Activism, the 2007 Financial Accounting and Reporting Section Conference, and the 2007 American Law and Economics Association Meetings for helpful comments and suggestions. April Klein was a research scholar at the University of Delaware’s John L. Weinberg Center for Corporate Governance during the 2006 to 2007 academic year.