Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors

My paper entitled “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors”, which I co-wrote with Emanuel Zur and which was recently accepted for publication in the Journal of Finance, examines recent aggressive campaigns by entrepreneurial shareholder activists, which we define as an investor who buys a large stake in a publicly held corporation with the intention to bring about change and thereby realize a profit on the investment.

We conduct our analyses on two samples of entrepreneurial activists. The first sample consists of 151 hedge fund activist campaigns conducted primarily between 2003 and 2005. The second sample contains 154 other entrepreneurial confrontational activist campaigns over the same time period. These activists are composed primarily of individuals, private equity funds, venture capital firms, and asset management groups for wealthy investors. The common feature of each group is that the investor is relatively free from the regulatory controls of the Securities Act of 1933, the Securities Exchange Act of 1934, and most notably the Investment Company Act of 1940.

We find similarities and disparities between our samples of hedge fund and other entrepreneurial activists.

The three main parallels are market reaction to the activism, a further significant increase in share price for the subsequent year, and the activist’s success in gaining its original objective. These findings suggest that the market, on average, believes activism creates shareholder value. Moreover, ex ante, the market is able to differentiate between overall successful and non-successful campaigns. For both groups of activists, the abnormal return surrounding the initial Schedule 13D filing is significantly higher for firms in which the activist gains its objective within one year, when compared to those firms in which the activist is unsuccessful.

The two main differences between the two categories of entrepreneurial shareholder activists are the types of companies each group targets and the activists’ post-13D filing strategies. Hedge fund activists target more profitable and financially healthy firms than other entrepreneurial activists. Hedge funds appear to address the free cash flow problem, since hedge fund activists frequently demand the target firm to buy back its own shares, cut the CEO’s salary, or initiate dividends, whereas other activists do not make these demands. In contrast, other entrepreneurial activists appear to redirect the investment strategies of their targeted firms.

The full paper is available for download here.