The impact of hedge fund activism on target firm performance, executive compensation and executive wealth
Open Access
- 19 October 2017
- journal article
- Published by Virtus Interpress in Journal of Governance and Regulation
- Vol. 6 (3), 14-28
- https://doi.org/10.22495/jgr_v6_i3_p2
Abstract
This paper examines the relationship between hedge fund activism and target firm performance, executive compensation, and executive wealth. It introduces a theoretical framework that describes the activism process as a sequence of discrete decisions. The methodology uses regression analysis on a matched sample based on firm size, industry, and market-to-book ratio. All regressions control for industry and year fixed effects. Schedule 13D Securities and Exchange Commission (SEC) filings are the source for the statistical sample of hedge fund target firms. I supplement that data with target firm financial, operating, and share price information from the CRSP-COMPUSTAT merged database. Activist hedge funds target undervalued or underperforming firms with high profitability and cash flows. They do not avoid firms with powerful CEOs. Leverage, executive compensation, pay for performance and CEO turnover increase at target firms after the arrival of the activist hedge fund. Target firm executives’ wealth is more sensitive to changes in share price after hedge fund activism events suggesting that the executive team experiences changes to their compensation structure that provides incentive to take action to improve returns to shareholders. The top executives reap rewards for increasing firm value but not for increased risk taking.Keywords
This publication has 15 references indexed in Scilit:
- Friends or Foes? Activist Hedge Funds and other Institutional InvestorsEconomics and Business Review, 2017
- Obstructing Shareholder Coordination in Hedge Fund ActivismSSRN Electronic Journal, 2016
- The Long-Term Effects of Hedge Fund ActivismPublished by National Bureau of Economic Research ,2015
- Hedge Fund Activism Canadian StyleSSRN Electronic Journal, 2013
- The Rise and Fall (?) of Shareholder Activism by Hedge FundsThe Journal of Alternative Investments, 2011
- The CEO pay sliceJournal of Financial Economics, 2011
- Empty voting and the efficiency of corporate governanceJournal of Financial Economics, 2011
- Hedge Fund Activism: A ReviewFoundations and Trends® in Finance, 2009
- Hedge Fund Activism, Corporate Governance, and Firm PerformanceThe Journal of Finance, 2008
- Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and VolatilityJournal of Accounting Research, 2002