The relationship between hedge fund activists and institutional shareholders in firms targeted by activists could be fraught with conflicting interests, making it a very important question to explore. In the paper “Institutional Investors and Hedge Fund Activism,” Simi Kedia, Laura Starks, and Xianjue Wang study how differences among institutional investors impact their willingness to support hedge fund activists, the impact on the campaign’s success, and potential value created from hedge fund activism. Simi, Laura, and Xianjue find that “activism-friendly institutional ownership” is associated with a much greater likelihood, than other types of institutional ownership, with the propensity of a firm being targeted. This result is suggestive of an assortative match between hedge fund activists and the firm’s ownership base. The paper also finds that pre-event activism-friendly ownership is associated with significantly higher long-term stock returns and operating performance of the target firm. These results help us understand how a firm’s ownership, specifically the type of institution, matters for the success of failure of campaigns. They are consistent with a role for the activism-friendly institutions in creating the right environment for hedge fund activists to push for changes in firm decisions and the subsequent impact on firm value.
Spotlight by Andrew Ellul
Photos courtesy of Simi Kedia, Laura Starks, and Xianjue Wang
First published September 17, 2020