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Hedge Fund Activism, Corporate Governance, and Firm Performance
Alon Brav, Duke UniversityWei Jiang, Columbia UniversityFrank Partnoy, University of San DiegoRandall Thomas, Vanderbilt University
Brav, Jiang, Partnoy, and Thomas 22006
Acquire shares and take actions that increase value. Tools: shareholder proposal, media campaign, proxy
contest, takeover. Very different from traditional strategy:
Identify mispricing, trade accordingly, and passively wait for convergence.
Can be denoted as activist arbitrage vs. pure trading arbitrage.
Trade off between two strategies has been analyzed theoretically: Bolton & von Thadden (1998), Kahn & Winton (1998),
Maug (1998).
Shareholder activism
Brav, Jiang, Partnoy, and Thomas 32006
What we know about activism Informed shareholder monitoring can reduce
agency problems But collective action problem
Non-HF activism positive but insignificant Other agency problems Regulatory/liquidity constraints
Why are HFs different? Manager incentives Fewer conflicts of interest Flexibility, unregulated
Brav, Jiang, Partnoy, and Thomas 42006
Goal of the study Bradly, Brav, Goldstein,and Jiang (2005): the 1st large-
sample study on HF activism, but the targets are confined to closed-end funds. Clear identification But CEFs are a small set of publicly traded companies
This one: first large-sample study on HF activism in regular corporations: Type of target? Typical strategies? Success? Short-term?
In general, does HF activism enhance or destroy shareholder value?
Brav, Jiang, Partnoy, and Thomas 52006
Data
No centralized data base for activist hedge funds. Initial sample started with news search on “hedge fund”
and “activism.” All 13D files by these funds are retrieved.
More funds recovered from processing the initial funds, and supplemented by people in the business. Retrieve all 13D files by the new funds.
Add activist events for the group of funds outside 13D from Spectrum 13F filings and news search.
Current sample: 2004-2005; new sample: 2001-2005.
Brav, Jiang, Partnoy, and Thomas 62006
Overview (current sample)
110 activist hedge funds. 374 hedge fund-target company pairs. 339 unique target companies in 54 SIC two-digit
industries. 41.7% (156 cases) of the sample saw aggressive
activism launched (beyond “communicating with the managers” on “maximizing shareholder value”).
27% of all the 13D filings involve group of hedge funds.
Brav, Jiang, Partnoy, and Thomas 72006
Stated objective of hedge funds
34.6%39.1% 39.7%
62.2%
4.5%
29.50%33.15%
30.95%
36.48%
70.91%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Capital Structure Business Strategy Sale of the TargetCompany
Governance Financing/Turnaround
% of all activist events average success rate
Brav, Jiang, Partnoy, and Thomas 82006
Activists’ Tactics
52%
17%
26%
8%
16%
8%6%
0%
10%
20%
30%
40%
50%
60%
Comm. withMgr
Seek boardrep. w/ocontest
Publicletter/SHproposal
Threat ofcontest/law
suit
Proxy contest Litigation Takeoverattempt
Brav, Jiang, Partnoy, and Thomas 92006
Commitment of capital
0.7 3.8 13.840.7
222.3
2.3 9.223.9
84.0
391.7
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
5% 25% 50% 75% 95%
Percentile of Sample Events
$ M
illio
n
Nonaggressive Aggressive
Brav, Jiang, Partnoy, and Thomas 102006
Length of investment (by June 2006)
0
200
400
600
800
1000
1200
1400
5% 25% 50% 75% 95%
Percentile
Day
s fr
om
13D
to
Bel
ow
5%
Non-Aggressive Aggressive
• In about 85% of the cases, HFs appear to still hold more than 5%. • Spectrum 13Fs reveal equity portfolio annual turnover rates of these funds at the 25th, 50th, and 75th percentile: 29.5%; 55.3%; 82.7%
Brav, Jiang, Partnoy, and Thomas 112006
Characteristics of target companies
Two methods:
1. Compare the target company to the mean statistics of industry-size-B/M matched firms.
2. Rank each target company within the match group, and calculate the mean ranking/percentile.
Brav, Jiang, Partnoy, and Thomas 122006
Characteristics of target companies
Dif w/ Match t-statAvg
Percentile
Mkt Cap -628 -5.28 0.51
Book to Mkt 0.148 4.90 0.59
Growth -0.018 -1.20 0.49
ROA 0.048 5.83 0.60
Cash Flows 0.035 3.89 0.55
LEV (Debt/Cap) 0.039 2.47 0.53
CASH -0.037 -3.65 0.48
DIV YLD -0.004 -4.46 0.46
R&D -0.029 -3.99 0.39
HERFINDAHL -0.033 -2.26 0.47
GINDEX 0.707 3.38 0.57
%INSTITUTION 0.122 8.04 0.64
Brav, Jiang, Partnoy, and Thomas 132006
Market reaction: 5-7% abnormal return
-0.01
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
Days relative to the 13D Date
Cu
mu
lati
ve
Ex
ce
ss
Bu
y-a
nd
-Ho
ld R
etu
rn
Brav, Jiang, Partnoy, and Thomas 142006
Longer-term returns (in months)
0.85
0.9
0.95
1
1.05
1.1
t-24
t-22
t-20
t-18
t-16
t-14
t-12
t-10 t-8 t-6 t-4 t-2
Event t+
2t+
4t+
6t+
8t+
10t+
12
Months relative to Event
All 13D Activism
Brav, Jiang, Partnoy, and Thomas 152006
Which activism matters?
coef t-statistic
ln(MV) -0.003 -0.230
General 0.055 3.764
CapStructure 0.000 0.001
BusStrategy 0.059 2.567
Sale 0.104 4.865
Gov -0.005 -0.296
Financing 0.168 2.592
• Strongest response to sale (of
the company) and financing
related activism.
• Purely capital structure and
governance targeting do not
generate abnormal returns.
• Hostile activism generates
stronger market reaction than
friendly ones.
Regressing (-20, 20) abnormal returns on stated objective:
Brav, Jiang, Partnoy, and Thomas 162006
Ongoing work: Effect on operational performance
-0.2
0.0
0.2
0.4
0.6
0.8
t-3 t-2 t-1 13D Year t+1
Pc
t P
oin
t D
iffe
ren
ce
to
Ma
tch
ed
F
irm
s
0.0
1.0
2.0
3.0
4.0
5.0
TOTPAYOUT (left) LEV (Right)
Capital structure decisions before and after (relative to matched firms)
Brav, Jiang, Partnoy, and Thomas 172006
Ongoing work
Finishing a complete sample of 130 activist funds, all their 13D filings, and out-of-13D activism in 2001-2005, altogether about 800 events.
Analyze the long term effect on target firms. Analyze returns to hedge funds and the life cycle
of the activist investment strategy. Model the decision to launch activism.