corporate governance and hedge fund activism

Corporate Governance and

Hedge Fund Activism

By

Shane Goodwin

Shareholder Activism & Corporate Defense 2

Agenda

Overview

History of Shareholder Activism

Defining the Activist Landscape: Setting the Stage

Literature Review

Hypothesis Development

Econometric Methodology

Data and Empirical Testing

Conclusion and Discussion

Shareholder Activism & Corporate Defense

Conventional Wisdom and Anecdotal Evidence…

3

For society as a whole, further empowering hedge funds with

short-term holding periods subjects Americans to lower long-

term growth and job creation…due to excessive risk

taking…when corporations maximize short-term profits.

Leo Strine, Chief Justice of the Delaware Supreme Court

Columbia Law Review, March 2014

Hedge-fund activism destroys jobs….such short-term

strategies may be good for shareholders, but aren’t good for

employees — or the economy as a whole.

Larry Fink, CEO BlackRock

December 12, 2014


History of Institutional Activism

Corporate “raiders”

strike fear into

corporations

Relatively

benign

shareholder

environment

Activist AUM reaches

new highs

Activists use war chests to

expand into new sectors

(energy, mining)

Target larger targets

(Apple, Microsoft)

1990s

1980s

Ea

rly

2000s

Late

2003

2006

—2007

2012

—p

rese

nt

La

te1990s—

2000

Tyco/WorldCom/Enron

scandals

Investors and

governments begin to focus on “corporate governance”

The profile of ISS rises

A new asset class is bornas some hedge fundsbegin to re-brand

themselves as “activists”

Bill Ackman launches

Pershing Square Capital No

ve

mb

er

2005

Nelson Peltz launches

Trian Fund Management

Se

pte

mb

er

15,

2006

Trian wins seminalproxy fight againstlarge cap U.S. target

Heinz thanks to thesupport of ISS and“mainstream” investors

Activists have high success rate in affectingchange, especially at US targets

Europe is seen as a new

frontier for activism

High-profile activist

campaigns (Cadbury

Schweppes and HSBC)

Ma

y29,

2008

Pardus Capital wins

seminal proxy fight at

Atos Origin, a French

target

Global

recession

Global financialmeltdown causesactivists to

retrench, especiallyfrom Europe

2008

—2009

Recovery and expansion: Activistsrestructure and the asset class

matures

Ma

y17,

2012Pershing Square

defeats "Club Canada" in seminal

proxy fight againstCanadian Pacific

Speculation activists

will re-enter Europe

and target Asia and

Australia

2014

Ma

y14,

2013

Third Point targets Sony

Ju

ly 1

,2011 Australia establishes the

“two strike” rule to hold directors accountable for

executive salaries andbonuses D

ecem

ber

2012 Shinzō Abe establishes

“three arrows” Japaneseeconomic policy of fiscal

stimulus, aggressivemonetary easing andstructural reforms

Source: FactSet and news articles.

Macro event

Micro event

4

~30% Institutional Ownership >70%

1980s Today


Institutional Shareholder Activism

Era of Governance-focused Activism

1985 – 2000

Era of Economic-motivated Activism

2000 – Present

ISS founded

1985

“New Kids on the Block” Hedge Fund Activists

Council of Institutional Investors Formed

Institutions Support Dismantling of Defenses

Increase in Shareholder Proposals

Emergence of “Corporate Raider”(i.e. Carl Icahn, T. Boone Pickens)

Focus of my Dissertation

Governance-focused activism facilitated the proliferation for the economically-motivated activist to launch successful campaigns


Evolution of Hedge Funds

($ in Billions)

More Hedge Funds + AUM = More Hedge Fund Activism

Source: HFR

0

2,500

5,000

7,500

10,000

12,500

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Num

ber o

f Funds

Assets

Under

Managem

ent

Assets Under Management Number of Funds

~$120 billion AUM by Activists


Capital allocated to activism is increasing

$19

$29

$48

$55

$32$36

$47$51

$66

$93

$120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: HFR and 13D Monitor as of December 31, 2014.

Hedge Fund Activism is Gaining Momentum

Estimated activist fund AUM ($ in billions)

Redemptions, asset

deflation

New high watermark

CAGR = 19.9%

7


338 321

280

236

197

153

124 102

82 72

57

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

8

266

227

171

143

107

84 65

51 38 35 29

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Governance Activism Has Weakened Structural Defenses

Decline driven by shareholder proposals

Source: Shark Repellent

S&P 500 Poison Pills in Force

S&P 600 Poison Pills in Force


50 52

66

42

8680

63

4756

34

17

72.0% 71.2% 71.2%66.7% 65.1%

58.8%50.8%

72.3%

87.5%82.4%

94.1%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Proposals % Passed

269

237

207181 172 164

146126

89

6049

259 256242 233 225

208193 187

176165

149

368 363352

332311

300 296 295 291 285 279

9

Classified Boards

Declassifications Proposals

Increased support during 2011, 2012, 2013, and YTD 2014 proxy seasons

Board Declassification: Significant Support in Recent Years

Source: Factset

S&P 500 S&P 400 S&P 600


110

142 137158 161

323

538

648

568

425443

427 438424

513

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Activist campaigns have increased

Source: SharkRepellent.

Note: Includes US campaigns as of December 31, 2014.

The birth of modern-dayhedge fund activism

Activist campaigns (2000 – 2014)

10

Data undercounts campaigns because increasingly common, private campaigns are not tracked


605962

45

6464

8583

95

30

80

71

95

25

20

106

5250

89

94

120

72

6058

101

110

31

117

Consumer Financial Healthcare Industrials Natural Real Estate Tech,

Retail Institutions Resources Media

& Telecom4Q13 13F 1Q14 13F 2Q14 13F 3Q14 13F

Source: Shark Repellent, Thomson, public filings

1Includes public campaigns at U.S. companies over $0.5bn market cap

New/Incr. Positions

4Q13 13F 459

1Q14 13F 503

2Q14 13F 487

3Q14 13F 549

44

5963

82

101

2010 2011 2012 2013 2014

… Enabling Them To Take More Positions… … And Launch More Campaigns1

.

More Positions and More Campaigns

11


3036 34

29

14

30 32 29

2

1 25

2

45

3

68

83 88

61

6640

5053

100

120124

95

82

74

87 85

2007 2008 2009 2010

Seeking majority(1)

2011 2012

Seeking minority

2013 2014

Seeking 50%

Proxy contests have remained relatively flat…

(40%)

18%

(2%)

30%30% 27% 31%

17%

41% 37% 34%

Number of proxy contests

Source: SharkRepellent data as of December 31, 2014.

Notes: Campaigns where formal notice of dissident proxy is publicly disclosed.(1) Seeking more than half of the Board seats.

12


41

[10]

45

[4]40

[3]

42

[3]39

[1] 26

[3]

38

[7]

47

[5]

27

[4]

27

[5]

38

[6]19

[3]

23

[0]

22

[1]

18

[4]

13

[1]

32

48

47

34

20

26

3125

100

95

82

74

87 85

2007 2008 2009 2010 2011

Withdrawn

2012

Went to Vote

2013 2014

Settlements

41% 32% 44%38%

35%

48% 44%55%

“Settlement fever”

125

120

… but, settlements are on the rise


Note: Bracketed numbers represent campaigns that were settled or withdrawn after an ISS recommendation.

Includes nominations as part of a hostile bid.

13

The expense and bandwidth requirements of a full campaign are onerous


14 16

2113 7

9

2419

7

4

11

22 4

1

1

25

37

24

2512 17

1711

46 57 56 40 21 30 42 31

2007 2008 2009 2010 2011 2012

Dissidents win minority seats sought(2)

2013

Incumbent wins(3)

2014

Dissident win majority of seats sought(1)

Shareholder support for dissident nominees has significantly increased

46%

35%

57%

38%43% 43%

60%

Dissidents

won at

least one

Board seat

50% of the

time65%

Includes nominations as part of a hostile bid

Vote results


(1) Includes winning half of the seats sought and campaigns which were settled prior to a vote and after an ISS recommendation was issued.Includes campaigns that were settled prior to a vote and after an ISS recommendation was issued.

Includes campaigns that were withdrawn prior to a vote and after an ISS recommendation was issued.

Includes five campaigns settled post ISS recommendation: Sotheby’s, Intevac, Hudson Global, Rand Logistics, and Cardica.

(2)

(3)

14

Anecdotal evidence indicates many investors wonder “what’s the harm?” of seating a shareholder “watch dog” on the board


Nobody is too big, too popular or too successful

15


Fight went

definitive(2)

Fight went the

distance(3)

21

3 3

1

2

21

41

1

1

1

4

4

10

10

14

12

2

8

6

3

14

Includes nominations as part of a hostile bid

ISS vote recommendations

17

10

15

3

12

11

2007 2008

ISS supports majority board change

2009 2010

ISS supports 50% board change

18 17

2011 2012

ISS supports minority board change

6 13

2013 2014

ISS supports management

17 14

ISS seems increasingly willing to support majority change

12% 7%25%

33%36%

18 22

11 17 8 10 4 8 11 11

Note: SharkRepellent data as of December 31, 2014.(1) Campaign under which dissident publicly discloses it delivered formal notice to the company that it intends to solicit proxies.(2) Dissident filed a definitive proxy.(3) Proxy fight outcome decided by a shareholder vote.

16

14

17

ISS supported majority and 50% board change increased in 2014, and remains above pre-2013 levels


Alliances Among Activists / Hedge Funds – “The Wolf Pack”

17

Source: FactSet, company filings and press releases

Perry Corp

Sarissa Capital Management

Soros Fund Management

Glenview Capital Management

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=YPrI2k0Ta9SP5M&tbnid=08T1xmkvjWrDRM:&ved=0CAUQjRw&url=http://www.crunchbase.com/company/paulson-co&ei=yRmUUreUJsGhkQf19oGACw&bvm=bv.57155469,d.aWc&psig=AFQjCNHFIf-77eqjeejycsGROU5SYLuaEQ&ust=1385523973794131

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=YPrI2k0Ta9SP5M&tbnid=08T1xmkvjWrDRM:&ved=0CAUQjRw&url=http://www.crunchbase.com/company/paulson-co&ei=yRmUUreUJsGhkQf19oGACw&bvm=bv.57155469,d.aWc&psig=AFQjCNHFIf-77eqjeejycsGROU5SYLuaEQ&ust=1385523973794131


U.S. corporate cash remains above historic levels

Source: Federal Reserve U.S. corporate balance sheet data as of December 31, 2014.

1,385

1,265

1,4961,519 1,519

1,6411,677

1,649

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Avg.$1,613

Corporate liquid assets

($ in billions)

2,000

1,895

1,693

18

24%


Activist Hedge Funds Pursue Multiple Strategies, Often in Combination

M&A Activism

19

Balance Sheet

Activism

Governance Activism

Operational Activism

The easiest activist strategy – quick capture of a takeover premium provides attractive returns over a short term using leverage

Demand strategic alternatives review (“sell the company” activism)

Spin-off divisions to unlock “hidden” value

Influence merger (“bumpitrage”) or block deals (“snap-back trade”)

An easy strategy – run a simple screen to identify targets

Return capital to shareholders (share buyback, special dividend)

Relies on accommodating markets

Coming back? Sell-side studies on record high cash on balance sheet

A means to an end – not an end in itself

Run a proxy fight to replace directors

Replace directors outside of AGM calendar

The hardest strategy, and hence rarest – requires industry experience and patience

Improve top and bottom lines

Change management, including direct attack on CEO

Focus on cost structure (SG&A, R&D), and ROIC

Activists look for opportunities to effect change that can result in short or long-term increases

in shareholder value

Easiest

Hardest

Str

ate

gic

Im

ple

me

nta

tio

n

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=hTbWEzsMGBpxMM&tbnid=1vDmi0tjO6ZBvM:&ved=0CAUQjRw&url=http://mojosavings.com/pg-coupons-packets/800px-pg_logo-svg/&ei=zJ3ZUuGqMozzoASMqIDYCA&bvm=bv.59568121,d.cGU&psig=AFQjCNEMOR9bB13VeEeGGDrB8mW2H2VssQ&ust=1390079814735255

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=hTbWEzsMGBpxMM&tbnid=1vDmi0tjO6ZBvM:&ved=0CAUQjRw&url=http://mojosavings.com/pg-coupons-packets/800px-pg_logo-svg/&ei=zJ3ZUuGqMozzoASMqIDYCA&bvm=bv.59568121,d.cGU&psig=AFQjCNEMOR9bB13VeEeGGDrB8mW2H2VssQ&ust=1390079814735255


Shareholders Believe Activism Can Create Value in the Aggregate

Dedicated Activist Funds

Continue to Attract New Investments

20

Activism Can Thrive in All

Market Environments

No Company is Immune

Shareholders Take a Balanced

View

Activist funds have the money and the mandate

$2 billion Pershing Square SPV to invest in a single company (Target)

CalPERS has invested more then $4 billion in 10+ activist funds

New funds being formed (Corvex, Casablanca, etc.)

Two popular tools in the activist tool box (“sell the company” and balance sheet activism) rely on accommodating markets

But weaker markets provide more activist targets, as investors search for alpha

Domestic large caps are not immune: Apple, Microsoft, P&G, Nupart

European activism: TNT, National Express, Cookson, Implenia, Actelion, Danisco, ABN Amro, Generali

Asian activism is not as prevalent, but is starting to appear (e.g. Olympus)

The agency problem: directors may rent seek, or fail to move quickly

The collective action problem: dispersed shareholder base

Short termism: seek to encourage long-term investment and prudent risk taking


The Activist Playbook

Stock Accumulation

Public Communications

Shareholder Proposals

Contested Proxy Solicitation

Least Aggressive

Most Aggressive

“A

cti

vis

m o

n t

he

Ch

ea

p”

Overarching tactical goal is to create and exploit divisions between management / Board / institutional shareholders – prey on company disunity and disorganization

Private Communication – “The Ask”


Activism Results in Superior Returns for the Hedge Funds...

22

Select Shareholder Returns vs. S&P 500

43%

31%

24% 24% 18% 16%

13% 13% 10% 10% 8% 8% 8% 6%

3% 0%

(2%)(7%) (9%)

(21%)

(42%)

Big

lari

Cap

ital

JAN

A

Per

shin

g Sq

uar

e

Oliv

er P

ress

New

cast

le P

artn

ers

Star

bo

ard

Sou

thea

ster

n

Rel

atio

nal

Val

ueA

ct

Thir

d P

oin

t

Clin

ton

Tria

n

Bar

ingt

on

Cap

ital

Ellio

tt

Bec

ker

Dra

pki

n

Gre

enlig

ht

Icah

n

Stee

l Par

tner

s

Dis

cove

ry G

rou

p

Bre

eden

Cap

ital

Har

bin

ger

Number of 13D Filings:

8 22 16 4 16 57 23 17 62 42 19 8 24 46 9 15 78 81 39 7 37

Average α: 7.3%

Source: 13D Monitor

Activism Continues to Emerge as an Asset Class as Returns Outperform


Evolving governance regime is derived from federal legislation, SEC rulemaking, state corporate

legislation, stock exchange rules, shareholder proposals, “best-practice” standards and judicial

decisions, principally those of the Delaware Court of Chancery.

Risk Management Executive

Compensation

Board Structure Director Elections Takeover Defenses

• Enhanced Risk

Management

Disclosure

• Board

Responsibility for

Risk Management

and Risk Failures

• Mandatory Board-

level Risk

Committees

• CEO Succession

Planning

Disclosure

• Say-on-Pay

• Say-on-Golden

Parachutes

• Cut Backs on

Golden Parachutes/

Eliminate Gross-

Ups

• Clawbacks

• Enhanced

Compensation

Disclosure

• Independent

Compensation

Committees and

Consultants

• Separate

Chair/CEO

• Director

Independence

• Elimination of

Classified Boards

• Enhanced Board

Structure

Disclosure

• Board Diversity

Policy Disclosure

• Direct

Shareholder

Communication

with Independent

Directors

• Majority Voting

• Shareholder Proxy

Access

• Eliminate Broker

Discretionary

Voting

• Enhanced

Candidate

Qualifications

Disclosure

• Eliminate

Shareholder Rights

Plans

• Eliminate Classified

Boards

• Lower Threshold for

Shareholder-

Initiated Special

Meetings

• Permit

Shareholders to Act

by Written Consent

• Eliminate

Supermajority

Voting Provisions

Governance-Focused Activists

23

Economic activists tend to use governance as a means to an economic end


Corporate social responsibility is a major concern for companies and boards.

Numerous “environmental and social” Rule 14a-8 shareholder resolutions proposed

during the 2014 proxy season, including:

Political contributions and activity

Environmental issues (including climate change, energy, other) and sustainability

Human rights

Board diversity

Animal welfare

Sexual orientation nondiscrimination/EEO reporting

Enhanced focus on political spending in light of the Supreme Court’s 2010 Citizens

United decision (and affirmation in 2012).

ISS voting policy on social and environmental proposals is on a case-by-case basis

considering whether implementation is likely to enhance and protect shareholder value

United Nations blueprint to promote human rights in the conduct of global business.

Social-Agenda Activists

24


Economic activism is now an established part of the capital markets, takeover and governance scene

Generally, economic activists do not seek to take over a company but advocate “value

maximizing” activity, often short-term oriented (e.g. share repurchases, spin-offs, balance sheet

and business strategy adjustments); however, more situations where activists are seeking control

of the board

Economic activism is made more effective by governance activism, which eliminates structural

defenses

“Value Maximization” Demands Other Strategic Demands

• “Break up” plays: spin-offs, split-ups, sell divisions / non-core

assets

• Return of capital (share repurchases; special

dividends; leveraged recapitalization)

• Advocate for sale of company

• Management change

• Board change (“withhold vote” campaign or short-

slate / full-slate proxy contest)

• New business strategies/initiatives

• New capital structure / capital allocation

• Compensation reform

• Monetize assets (e.g., real estate; IP) through complex

structuring

• Block a transaction or initiative (or new terms)

Economically-Motivated Activists: Hedge Funds

25


Directors are Coming Under Fire

1

Long Tenure

Perceived or Real

Conflict of Interests

Other Boards

(i.e., Over-boarded)

Lack of Industry Expertise

Lack of Economic

Ownership

The Impact of Activism on Board Composition

26

Activists are increasingly assembling slates of directors with a mix of seasoned executives, corporate governance notables, and others with

“investor” perspective


Literature Review


Theoretical Foundations of Shareholder Activism

28

The underlying theoretical foundation in the study of shareholder activism is agency theory. The

central tenet of agency theory is an overarching concern about the divergence of interests between

principals and agents (Berle and Means, 1932; Jensen and Meckling, 1976).

The presumption of opportunistic behavior by managers gave rise to agency theory, which was further

enhanced by the work of Jensen and Meckling (1976) and Fama and Jensen (1983) who posit that

managers may misuse corporate causing principal-agent issues. As a result, agency theory logic

would suggest that shareholder activism is one external control option for owners who are

dissatisfied with the management of their assets.

Some argue that the board of directors has not done a good job in their role as monitor and failed to

remove underperforming executives (Lorsch & Maciver, 1989; Mace, 1986; Weisbach, 1988). In

addition, Jensen and Smith (1985) argue that managers are more likely to minimize risk, engage in

short-term investments and employee growth strategies to increase their compensation as well as

their job security.

Shareholders have three options: (1) sell their shares, (2) passively continue to hold their shares in the

hope that things will improve over time, or (3) continue to hold their shares and attempt to

influence the firm. Option three is the path chosen by shareholder activists. However, activism is not

costless and only shareholders with the knowledge and resources can attempt to “voice” their

displeasure with underperforming corporations (Shleifer and Vishny, 1986; Admati et al., 1994).

Critics claim economically-motivated shareholder activists may have different objectives for their

target firms than other shareholders. However, active board engagement is supported and endorsed

by other shareholders since an activist would need the voting support of the majority of the

shareholders.


Literature Review

29

One possible solution to mitigate agency cost is for shareholders to actively monitor the firm’s

management. However, while monitoring may reduce agency and improve firm value, this effort is

not without cost and the benefits from monitoring are enjoyed by all shareholders (Grossman and

Hart, 1980).

Shareholders that serve as active monitors of firm management to provide a disciplinary

mechanism is not a new concept. Gillan and Starks (2007) define shareholder activists as “investors

who, dissatisfied with some aspect of a company’s management or operations, try to bring about

change within the company without a change in control.” Tirole (2006) provides the following

definition: “Active monitoring consists in interfering with management in order to increase the value of

the investors’ claims.”

Theory predicts that large shareholders should be effective monitors of the managers of publicly listed

firms, reducing the free-rider problem ((Shleifer and Vishny (1986) and Grossman and Hart (1980)).

Earlier studies show that when institutional investors, particularly mutual funds and pension

funds, follow an activist agenda, they do not achieve significant benefits for shareholders (Black

(1998), Karpoff (2001), Romano (2001), and Gillan and Starks (2007)).

Unlike mutual funds and pension funds, hedge funds are able to influence corporate boards and

managements due to key differences arising from their organizational form and the incentive

structures.


Literature Review

30

Brav, Jiang, Partnoy, and Thomas (2008) find that the announcement of hedge fund activism

generates abnormal returns of more than 7% in a short window around the announcement.

Recent research by Bebchuk, Brav and Jiang (2013) find statistically meaningful evidence that the

operating performance of target firms improves following activist interventions but no evidence to

support the claim that short-term improvement was at the expense of long-term performance.

The proxy contest process is a meticulously regulated election mechanism which can be invoked

when “one group, referred to as ‘dissidents’ or ‘insurgents’ attempt to obtain seats on the

firm’s board of directors currently in the hands of another group, referred to as ‘incumbents’ or

‘management’” (Dodd and Warner, 1983).

Venkiteshwaran, Iyer and Rao (2010) conducted a detailed study of hedge fund activist Carl Icahn’s

13D filings and subsequent firm performance and found significant share price increases for the target

companies (of about 10%) around the time Icahn discloses his intentions publicly. Additionally, the

author’s found a significant number (1/3) of Icahn’s targets ended up being acquired or taken private

within 18 months of his initial investment. The shareholders of those companies earned abnormal

returns of almost 25% from the time of Icahn’s initial investment through the sale of the

company.


Literature Review

31

Determinants of Shareholder Activism

• Prior Firm Performance

• Firm Size

• Free Cash Flow

• Board of Director Characteristics

• Ownership Structure

Active Monitoring by Shareholders

Efficacy of Shareholder Activism

• Impact on Firm Performance

• Short-term Market-based Firm Performance

• Long-term Market-based Firm Performance

• Accounting-based Firm Performance


Hypothesis Development


Hypothesis 1: Determinants of Hedge Fund Activism – Firm Performance

33

Numerous studies that use various market and accounting-based financial measures to test firm

performance to determine the vulnerability of a target firm by an activist hedge fund.

However, short interest ratio (i.e., shares sold short) as a measure of a target firm’s performance has not

been used to determine a company’s vulnerability regarding hedge fund activism.

According to Asquith et al (2005), shares sold short, as a percentage of shares outstanding, have more

than doubled in the last 20 years. In dollar terms, the increase is more than twentyfold. Shareholders,

particularly large blockholders, may induce good managerial behavior by exiting and pushing down stock

prices when bad managerial actions are taken (e.g., Admati and Pfleiderer, 2009; Edmans, 2009; Edmans

and Manso, 2011).

Can short selling be used as a proxy for managerial misbehavior? Short sellers are known to be

informed (Senchack and Starks, 1993; Asquith et al. 2005; Cohen et al. 2007; Boehmer et al., 2008) and

highly motivated to attack bad firms (e.g., Karpoff and Lou, 2010; Hirshleifer et al., 2011). Short selling

appears to discipline managers and reduce their incentives to manipulate (Massa et al., 2013). Massa et

al (2013) claim that shareholders can rely on the external disciplining mechanism of short selling instead

of engaging in direct monitoring of managers.

I posit that short selling is a signal of increased agency cost and is a proxy for expected future firm

performance that can be used by activist hedge funds to identify potential targets to serve as a

disciplinary mechanism to monitor management via board representation.

Hypothesis 1: There is a significant positive correlation between hedge fund activism and an increase in the short-interest position experienced by target firms ex-ante an activist intervention.


Hypothesis 2: Determinants of Hedge Fund Activism – Inside Ownership

34

Three studies looked at insider ownership as a determinant of shareholder activism. Bethel et al. (1998)

found that firms with low insider ownership are more likely to be targeted among blockholders. Bizjak

and Marquette (1998) and Akyol and Carroll (2006) studied proxy resolutions directed at poison pill

removal and both found that insider shareholding was negatively associated with activists’ efforts to

remove poison pills via proxy resolutions and negotiations.

Little is known about how ownership characteristics of firms lead them to be targeted by shareholder

activists. Bethel et al. (1998) definition of “blockholder” was any group owning five percent (5%) or

more. This included pension funds, banks and other investors. They did not delineate between activist

and non-activist investors.

Since hedge fund activists ultimately reply on the support of other shareholders, I assert that many

activist hedge funds target firms with nominal “corporate inside” ownership.

I define “corporate inside” ownership as equity securities that are beneficially owned by the company’s

officers and directors and I exclude any institutions or non-company officers and directors that are

considered insiders by SEC since they are beneficial owners of more than ten percent of a class of the

company’s equity securities.

Hedge fund activists target companies with nominal “corporate ownership” for two primary reasons.

First, it will ensure an increased likelihood of success if a management team cannot “block” a proxy

voting contest and, second, it supports the narrative that a management team with nominal ownership is

entrenched and not acting in the best interest of the owners.

Hypothesis 2: There is a significant positive correlation between hedge fund activism and nominal “corporate inside” ownership.


Hypothesis 3: Activist Hedge Fund Intervention – Board Representation

35

Shleifer and Vishny (1997) explain that “corporate governance deals with the ways in which the

suppliers of finance to corporations assure themselves of getting a return on their investment.”

The fundamental feature of corporate governance is shareholder’ right to elect directors to represent

their interests.

Shareholders can discipline directors through proxy contests. During the 1980s, dissident shareholders

more often relied on hostile tender offers to effectuate change at a target firm. However, during the last

decade activist shareholders have relied more often on proxy contests. More importantly, hedge fund

activists are the primary initiators of proxy contests, launching 812 (63%) of all proxy fights since 1995.

Activist hedge funds face limited regulatory constraints and can be effective in exploiting the

proxy-contest mechanism (Brav, Jiang, Partnoy, and Thomas, 2008).

There have been many studies with respect to proxy contests, but there is a void in the literature

regarding activist hedge fund seeking board representation to act as a disciplinary mechanism to

monitor management.

Hypothesis 3: There is a significant positive correlation between board representation of an activist hedge fund ex post an intervention and nominal “corporate inside” ownership.


Hypothesis 4: Active Hedge Fund Monitoring – Ex Post Intervention

36

While the topic of shareholder activism is not new, the topic of hedge funds as activists is rather new.

Activist hedge funds have been the most prominent and successful proponents of institutional shareholder

activism in recent decades (Gillan and Starks 2007). Boyson and Mooradian (2011) noted that the idea of

hedge funds as activists is in direct contrast with their image as short-term, opportunistic investors

Short-term Effects of Active Monitoring. Theory predicts that large shareholders should be effective

monitors of the managers of publicly listed firms, reducing the free-rider problem ((Shleifer and Vishny

(1986) and Grossman and Hart (1980)). Yet the evidence that large shareholders increase

shareholder value is mixed. In two recent surveys, Karpoff (2001) and Romano (2001) conclude that

activism conducted by large institutional shareholders (i.e., pension funds and mutual funds) has had little

impact on firm performance. Karpoff, Malatesta, and Walkling (1996), Wahal (1996), and Gillan and Starks

(2000) report no persuasive evidence that shareholder proposals increase firm values, improve operating

performance or even influence firm policies.

Brav et al (2008) is the only credible study conducted to test empirically the short-term effects of activist

hedge funds on target firms. Using data set from 2001 to 2006, the authors find that activist hedge funds

in the U.S. proposed strategic, operational, and financial remedies and attain success or partial success in

two-thirds of the cases.

Hypothesis 4: There is a significant positive “initial” market reaction on the announcement date that a hedge fund dissident shareholder has been granted board representation to function as a disciplinary mechanism to monitor management


Hypotheses 5 and 6: Active Hedge Fund Monitoring – Ex Post Intervention

37

Long-term Effects of Active Hedge Fund Monitoring. Activist hedge funds have been the most

prominent and successful proponents of institutional shareholder activism in recent decades (Gillan and

Starks 2007). Very few studies on the impact of hedge fund activism and short-term performance of

target firms. Importantly, there are no credible studies in the finance literature with respect to hedge

fund activism and its long-term implications (greater than one year) of the target firms’ long-term

shareholders and the long-term operating performance of those firms.

Bebchuk, Brav and Jiang (2013) found that contrary to the claim that hedge fund activists adversely

impact the long-term interests of organizations and their shareholders, there is evidence that activist

interventions lead to improved operating performance in the five years that follow the interventions.

Consistent with their previous research, the dataset used by Bebchuk, Brav and Jiang (2013) is

primarily constructed from Schedule 13D filings

Hypothesis 5: Hedge fund activism generates statistically significant long-term value for the target firms and its long-term share when they function as a disciplinary mechanism to monitor management via board representation.

Hypothesis 6: Hedge fund activism generates statistically significant improvement in long-term operating performance for the target firms and its long-term share when they function as a disciplinary mechanism to monitor management via board representation.


Econometric Methodology


Endogeneity

39

According to Roberts and Whited (2012), one of the most important and ubiquitous issues

confronting studies in empirical corporate finance is endogeneity.

Endogeneity is essentially a correlation between the explanatory variables and the error

term in a regression – which leads to biased and inconsistent parameter estimates that

make reliable inference virtually impossible.

Endogeneity can be caused by three circumstances

1. Omitted Variables

2. Measurement Error

3. Simultaneity

The potential biased effects of endogeneity leads to:

1. Rejecting a hypothesis that in fact is true (Type I Error)

2. Fail to reject a hypothesis that in fact is false (Type II Error)


Endogeneity

40

Potential sources of endogeneity in the study of hedge fund activism.

1. Timing with respect to the announcement of board representation by an activist hedge fund. If

not handled correctly, this endogeneity can invalidate results concerning the market’s short-run

reaction.

Potential Solution: Search news events around the announcement date and eliminate

confounding news.

2. Target firm characteristics – a hedge fund’s decision to target a firm. This endogeneity may

present a problem while comparing activism targets to firms not targeted by activism, since

these firms likely differ from each other in both observable and unobservable ways.

Potential Solution: Research design will reduce this problem, since to appear in my sample, a

firm must already be a target of hedge fund activism.

• Conditional upon being a hedge fund activism target with respect to the control group.

• Select a control sample to deal with unobserved heterogeneity in hedge fund manager skill

or technique.

• Construct a Control Group of all hedge fund activist campaigns that did not result in board

representation during the same period.


Endogeniety – The Problem at its Core

41

Consider the following main equation of interest:

yi = β0 + β1x1i + β2x2i + · · · + βk xki + γqi + vi

Here qi is the unobserved variable (such as confounding events at the

time of the activist intervention) and vi is the traditional error term

If we omit qi the equation transforms into:

yi = β0 + β1x1i + β2x2i + · · · + βk xki + ui

where ui = γqi + vi

If cov (qi ,xj ) /= 0 where j ∈1,2, . . . , k, then cov (ui ,xj ) /= 0

We violate one of the OLS assumptions ---tthis is the endogeneity

problem which represents a potential bias


Endogeniety – Bias and Instrumental Variables (IV) Regression

42

One cannot consistently estimate any of the βjs, when ui is correlated

with any of the regressors

Each of the βjs consists of the ’true’ βj + an omitted variables bias

γ > 0 and cov (xi ,qi ) > 0 leads to an upwards/positive bias in stimates

(e.i., the effect of xi is overestimated)

Instrumental variables (IV) regression is designed to control for

unobserved heterogeneity

IV regression is designed to correct the esimates in the main equation

as an effect of the unobserved


“Sample Selection Bias” – Omitted Variables Endogeneity

43

An important problem of causal inference is how to estimate treatment effects in observational studies,

situations in which a group of units is exposed to a well-defined treatment (i.e., shareholder activism,

board representation) but no systematic methods of experimental design are used to maintain a control

group.

It is well recognized that the estimate of a causal effect obtained by comparing a treatment group with

a non-experimental comparison group could be biased because of problems such as self-selection or

some systematic judgment by the researcher in selecting units to be assigned to the treatment.

Potential Solution:

Propensity Score Matching. Matching involves pairing treatment and comparison units that are

similar in terms of their observable characteristics. When the relevant differences between any two

units are captured in the observable (pre-treatment) covariates, which occurs when outcomes are

independent of assignment to treatment conditional on pre-treatment covariates, matching methods

can yield an unbiased estimate of the treatment impact.

The motivation for focusing on propensity score matching methods is that the dimensionality of the

observable characteristics is high. Propensity score matching methods, are especially useful under

circumstances with many variables, because they provide a natural weighting scheme that yields

unbiased estimates of the treatment impact.

I use propensity score matching to address self-selection bias by constructing two control

groups (Control Group I : Target Firms that “won” the proxy fight against Hedge Fund Activists

and Control Group II : Board representation by Non-Hedge Fund Activists.)


Fixed Effects Model (FE)

44

Target Firm-specific Effects Model

I assume that there is unobserved heterogeneity across target firms captured by a i

The main question is whether the target firm-specific effects a i are correlated with the

regressors. If they are correlated, I will use a fixed effects model.

The FE model allows the target firm-specific effects a i to be correlated with the

regressors x

I include a i as intercepts

Each target firm has a different intercept term and the same slope parameters.

I recover the target firm specific effects after estimation as:

In other words, the target firm-specific effects are the leftover variation in the dependent

variable that cannot be explained by the regressors.

Time dummies can be included in the regressors x.


Endogeneity – Econometric Techniques

45

The combination of complex decision processes facing firms and limited information

available to researchers ensures that endogeneity concerns are present in every corporate

finance study.

I reviewed the sources of endogeneity — omitted variables, simultaneity, and measurement

error — and their implications for inference.

I used the following econometric techniques aimed at addressing endogeneity problems

including:

• matching methods; and

• panel data methods


Empirical Test and Results

46

Cross-Sectional Firm Operating Performance

Tobin’s Q= (Market value of assets) / (Replacement cost of assets)

Return on assets (ROA) = (EBIT * (1-tax rate)) / ((Total Assets(t) + Total Assets(t-1)) / 2)

ROIC = (EBIT * (1-tax rate)) / ((Total Debt + Preferred Equity + Total Common Equity)(t)) +

((Total Debt + Preferred Equity + Total Common Equity)(t-1)) / 2)

ROE = Net Income / ((Total Common Equity + Preferred Equity + Total Minority))

Financial Leverage (Total Debt to Capital) = Total Debt / (Total Preferred Equity + Total

Common Equity+ Total Debt + Minority Interest)(t)) + ((Total Common Equity + Preferred

Equity + Total Minority Interest)(t-1)) / 2)

Payout Ratio (Common Dividends + Preferred Dividends) / Net Income

CAPEX / Sales = Total Capital Expenditures / Total Revenues


Empirical Test and Results

47

Long Term Stock Returns

Capital Asset Pricing Model (CAPM), the standard procedure is to estimate an “alpha,” the

average excess return that is not explained by co-movement with the market. Specifically, we

estimate for each firm i an alpha using the following regression:

Fama-French-three-factor asset pricing model, the standard procedure is to estimate an

“alpha,” the average excess return that is not explained by the three market-wide factors

identified in by Fama and French (1993). We estimate for each firm i an alpha using the

following regression:

Fama-French-Carhart four-factor asset pricing model, the standard procedure is to

estimate an “alpha,” the average excess return that is not explained by the four market-wide

factors identified by Fama and French (1993) and by Carhart (1997). We estimate for each

firm i an alpha using the following regression:

rit - rf = ai + β1RMRFt + Eit

rit - rf = ai + βi1RMRFt + βi2SMBt + βi3HMLt + Eit

rit - rf = ai + βi1RMRFt + βi2SMBt + βi3HMLt + βi4M0Mt + Eit


Buy-and-hold abnormal returns (BHAR) Approach

48

In recent years, following the works of Ikenberry, Lakonishok, and Vermaelen (1995), Barber and Lyon

(1997), Lyon et al. (1999), the characteristic-based matching approach (or also known as the buy-and-

hold abnormal returns, BHAR) has been widely used.

Mitchell and Stafford (2000) describe BHAR returns as “the average multiyear return from a strategy of

investing in all firms that complete an event and selling at the end of a pre-specified holding period

versus a comparable strategy using otherwise similar nonevent firms.”

An appealing feature of using BHAR is that buy-and-hold returns better resemble investors’ actual

investment experience than periodic (monthly) rebalancing entailed in other approaches to measuring

risk-adjusted performance.

Once a matching firm or portfolio is identified, BHAR calculation is straightforward. A T- month BHAR

for event firm i is defined as:

BHARi (t, T) = Pt = 1 to T (1 + Ri,t) - Pt = 1 to T (1 + RB,t)

nBHARBHARt

or

nCARCARt

iiBHAR

iiCAR

//

//

I test empirically the significance of each coefficient using the following equation:

I constructed multiple BHAR portfolios of stocks from 1990-2014 for the Treatment Group, both

Control Groups and Matching Firms.


Calendar-time portfolio approach (Jensen’s alpha)

49

The calendar-time portfolio or Jensen-alpha approach to estimating risk-adjusted abnormal performance

is an alternative to the BHAR calculation using a matched-firm approach to risk adjustment. Jaffe (1974)

and Mandelker (1974) introduced a calendar time methodology to the financial-economics literature, and

it has since been advocated by many, including Fama (1998), Mitchell and Stafford (2000) and Brav and

Gompers (1997).

The distinguishing feature of the most recent variants of the approach is to calculate calendar-time

portfolio returns for firms experiencing an event, and calibrate whether they are abnormal in a multifactor

regression. The estimated intercept from the regression of portfolio returns against factor returns is the

post-event abnormal performance of the sample of event firms.

I implemented the Jensen-alpha approach for a five year period during the pre-event (i.e., prior to the

dissident / activist board seat grant date) and then post-event annually for a five year period.

In each calendar month over the entire sample period, a portfolio was constructed comprising all firms

experiencing the event within the previous month. The portfolios are rebalanced each month and an

equal or value-weighted portfolio excess return will be calculated. The resulting time series of monthly

excess returns is regressed on the CAPM market factor and the three Fama-French (1993) factors as

follows:

Rpt – Rft = αp + βp (Rmt – Rft) + βp,SMBSMBt + βp,HMLHMLt + εpt

Where;

Rpt is the equal or value-weighted return for calendar month t for the portfolio of event firms that experienced the event within previous T years,

Rft is the risk- free rate,

Rmt is the return on the CRSP value-weight market portfolio,

SMBpt is the difference between the return on the portfolio of “small” stocks and “big” stocks;

HMLpt is the difference between the return on the portfolio of “high” and “low” book-to-market stocks;

αp is the average monthly abnormal return (Jensen alpha) on the portfolio of event firms over the T-month post-event period,

βp is the beta (the sensitivities) of the event portfolio to the three factors.


Data and Empirical Testing


Primary Research Question

51

Primary Research Question

• My dissertation addresses two fundamental questions with respect to

hedge fund activism:

1. What are the determinants of hedge fund activist interventions

and the characteristics of the Target Firms? and;

2. Does hedge fund activism create long-term value for Target

Firms and their long-term shareholders?

Hedge-fund activism destroys jobs….such

short-term strategies may be good for

shareholders, but aren’t good for employees

— or the economy as a whole.

Larry Fink, CEO BlackRock

December 12, 2014

For society as a whole, further empowering

hedge funds with short-term holding

periods subjects Americans to lower long-

term growth and job creation…due to

excessive risk taking…when corporations

maximize short-term profits.

Leo Strine, Chief Justice of the Delaware Supreme Court

Columbia Law Review, March 2014


Data and Methodology

52


Characteristics of Target Firms and Activist Campaigns (1990-2014)

53


Target Firm Outcome Ex Post Hedge Fund Intervention

54

Hedge Fund Activism vs. HF Board Representation

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ale

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r


Hypothesis 1: Determinants of Hedge Fund Activism – Short Selling

55

Hypothesis 1: There is a significant positive correlation between hedge fund activism and an increase in the short-interest position experienced by target firms ex-ante an activist intervention.

Short Interest Ratio is defined as:

Short Interest Ratio =

Shares Sold Short

Total Shares Outstanding

(5.1)

Note: Short interest reflects the Target Firms short position on the last business day of the each month. The short interest data was collected via FT

Interactive and Compustat which includes all positions from the New York Stock Exchange, American Stock Exchange, and NASDAQ. The data was

aggregated and merged into my shareholder activist dataset using GVKEY and CUSIP firm identifiers. All potentially unbounded variables are winsorized

at the 1% and 99% extremes.



56

Target Firms vs. Matched Firms and Industry Composites

(Ex Ante and Ex Post Activism Event)



57

Change in Short Interest Position of Target Firms Ex Ante Activist Intervention

(Hedge Fund Activism versus Non-Hedge Fund Activism)

This table reports the change in Short Interest Position of Target Firms of hedge fund and non-hedge fund activist interventions between t-6 and t-1 the event. The Short Interest Ratio is defined as (Shares Sold Short / Total Shares Outstanding). All potentially unbounded variables are winsorized at the 1% and 99% extremes. The significance level, which was determined by the t statistic, is asymptotically normal for paired differences.

Coefficients marked with *** are significant at the 1% level, ** at the 5% level and * at the 10% level.



58

Change in Short Interest Ratio Relative to Other Vulnerability Variables




59

Notwithstanding the statistically significant evidence to support an

increase in the absolute magnitude of the Target Firms short

interest position, there is NO statistically significant evidence with

respect to the marginal “change” of the Target Firm’s short interest

position ex ante a Hedge Fund intervention.

Therefore, based on the empirical testing, I “fail” to reject the

null hypothesis and I cannot conclude There is a significant

positive correlation between Hedge Fund activism and an increase

in the short-interest position experienced by Target Firms ex ante

an activist intervention.

Conclusion



60

Hypothesis 2: There is a significant positive correlation between hedge fund activism and nominal “corporate inside” ownership.

This table reports the Quarterly Corporate Ownership of Target Firms one month ex ante for both Hedge Fund and Non-hedge Fund activist interventions. The ownership data is from the

FactSet/LionShares database, which provides portfolio holdings of both institutional and individual investors. FactSet compiles ownership information from public filings by investors (such as 13-F

filings, Form 3 and Form 4), company annual reports, stock exchanges, and regulatory agencies around the world. The SEC ”Corporate insiders” as a company’s officers and directors, and any beneficial

owners of more than 10% of a class of the company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934 – must file with the SEC a statement of ownership regarding

those securities. The data in the table excludes any institutions or noncompany officers and directors that are required to file with the SEC because they are beneficial owners of more than 10%

of a class of the company’s equity securities. Institutions are defined as professional money managers, including mutual fund companies, investment advisors, pension funds, bank trusts, and insurance

companies. All potentially unbounded variables are winsorized at the 1% and 99% extremes. t statistics in parentheses. The significance level, which was determined by the t statistic, is

asymptotically normal for paired differences.




61

Quarterly Corporate Ownership of Hedge Fund Activist Interventions

(Robustness Check)




62

The results of the empirical testing show a statistically meaningful

correlation between Hedge Fund activism and nominal “corporate

inside” ownership.

I report a statistically significant difference. Therefore, I reject the

null hypothesis to conclude There is a significant positive

correlation between hedge fund activism and nominal

“corporate inside” ownership.

Conclusion



63


This table reports the Quarterly Corporate Ownership of Target Firms one month ex ante for the Treatment Group and both Control Groups. The Treatment Group is all Target Firms that granted at least

one board seat to a dissident Hedge Fund, Control Group I is defined as Target Firms of all proxy fights campaigns that did not result in board representation during the same period and Control Group

II is comprised of Target Firms that granted at least one board seat to a Non-hedge Fund dissident shareholder during the same time period. The ownership data is from the FactSet/LionShares database,

which provides portfolio holdings of both institutional and individual investors. FactSet compiles ownership information from public filings by investors (such as 13-F filings, Form 3 and Form 4), company

annual reports, stock exchanges, and regulatory agencies around the world. The SEC ”Corporate insiders” as a company’s officers and directors, and any beneficial owners of more than 10% of a class of the

company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934 – must file with the SEC a statement of ownership regarding those securities. The data in the table excludes any

institutions or noncompany officers and directors that are required to file with the SEC because they are beneficial owners of more than 10% of a class of the company’s equity securities. Institutions are

defined as professional money managers, including mutual fund companies, investment advisors, pension funds, bank trusts, and insurance companies. All potentially unbounded variables are winsorized at

the 1% and 99% extremes. t statistics in parentheses. The significance level, which was determined by the t statistic, is asymptotically normal for paired differences.




64




The results of the empirical testing show a statistically meaningful correlation

between board representation of a Hedge Fund Activist and nominal “corporate

inside” ownership (t−3 months) ex post the Board Seat Grant Date. In contrast,

Control Group I and Control Group II are not statistically significant and

Target Firms that “won” the proxy fight against Hedge Fund Activists report

positive coefficients with respect to “corporate inside” ownership.

Therefore, I find statistically significant support to reject the null hypothesis to

conclude there is a significant positive correlation between board representation of

an activist hedge fund and nominal “corporate inside” ownership (t−3 months) ex

post the Board Seat Grant Date.


Conclusion


Hypothesis 4: Active Hedge Fund Monitoring – Ex Post Intervention (Short-term Returns)

66

Hypothesis 4: There is a significant positive “initial” market reaction on the announcement date that a hedge fund dissident shareholder has been granted board representation to function as a disciplinary mechanism to monitor management



The empirical results indicate that activism is perceived favorably by the stock market,

with strong evidence of short-term increases in a Target Firms’ stock price. Within my

dataset of sample Target Firms, certain types of activism are strongly positively related

to short-term stock performance.

Target Firms of Hedge Fund activists that seek board representation generate

positive and statistically significant stock performance relative to Target Firms that did

not receive the disciplinary effects of hedge fund monitoring.

Therefore, I find statistically significant support to reject the null hypothesis

and conclude that there is significant positive “initial” market reaction on the

announcement date that a hedge fund dissident shareholder has been granted board

representation to function as a disciplinary mechanism to monitor management.

Hypothesis 4: Active Hedge Fund Monitoring – Ex Post Intervention (Short-term Returns)

Conclusion


Hypotheses 5: Active Hedge Fund Monitoring – Ex Post Intervention (Long-term Returns)

68

Hypothesis 5: Hedge fund activism generates statistically significant long-term value for the target firms and its long-term share when they function as a disciplinary mechanism to monitor management via board representation.

Buy and Hold Portfolio Approach

Calendar-time Portfolio Approach



69

WilcoxonMatched-Pairs Signed-Ranks Test of Treatment andControlGroups



70

Calendar-time Portfolio Approach



The foregoing results suggest that Hedge Fund Activist seeking board

representation generate positive “alpha” (α) around event time for

Target Firms and the positive abnormal returns do not revert up to a five

years ex post the board seat grant date.

Therefore, the evidence clearly refutes the market over-reaction

hypothesis and supports the hypothesis (H5) that Hedge Fund

Activism creates long-term value for Target Firms and its long-term

shareholders when they function as a disciplinary mechanism to monitor

management via board representation.


Conclusion


Hypotheses 6: Active Hedge Fund Monitoring – Ex Post Intervention (LT Op. Performance)

72

Hypothesis 6: Hedge fund activism generates statistically significant improvement in long-term operating performance for the target firms and its long-term share when they function as a disciplinary mechanism to monitor management via board representation.



73



74



75



76

Treatment Group vs. Control Group I



77

Treatment Group vs. Control Group II


I find that Target Firms significantly under-perform Matched Firms and a

composite of industry peers ex ante a Hedge Fund Activist obtaining at least one

board seat. These findings are consistent with previous literature. However, these

Target Firms demonstrate a dramatic improvement post intervention, up to five

years ex post the board seat grant date. Many of these results are statistically

significant relative to Matched Firms.

The results indicate that Hedge Fund activists that seek board representation

have been successful in improving operating performance, increasing payouts,

enhancing corporate governance and reducing agency costs of Target Firms. I find

no evidence that there is a reversal in operating performance. Overall,

the Treatment Group experiences better operating performance five

years ex post board representation then Control Group I.



Conclusion / Contribution

79

Over the past two decades, hedge fund activism has emerged as new

form of corporate governance mechanism that brings about operational,

financial and governance reforms to a corporation.

Many prominent business executives and legal scholars are convinced

that the entire American economy will suffer unless hedge fund activism

with its perceived short-termism agenda is significantly restricted.

Shareholder activists and their proponents claim they function as a

disciplinary mechanism to monitor management and are instrumental in

mitigating the agency conflict between managers and shareholders.

The vast majority of shareholder activism literature is predicated on

Schedule 13D filings. However, I assert that the optimal dataset to

empirically test the long-term effects of shareholder activism should be

based on board representation of target firms by a shareholder activist.


Conclusion / Contribution

80

My research fills the important void with respect to the shareholder

activism initiated by hedge funds. Novel approach to inside

ownership and short-interest positions as instrumented variables that

predict a target firm’s vulnerability

Expansive, hand-collected dataset and unique empirical research

design methodology with respect to board representation will fill the

important void in the literature regarding the long-term efficacy of hedge

fund activists serving as a disciplinary mechanism on the firm by actively

seeking board representation to monitor management.

My findings will suggest that hedge fund activism generates long-term

value for target firms and its long-term shareholders when they function

as a shareholder advocate to monitor management through active

board engagement.


Extension of Research and Future Publication Opportunities

81

Extension of Research

• Corporate governance and shareholder activism remains an

important topic of debate for scholars and practitioners

• There are several extensions of research to be considered:

• Managerial ownership vs institutional ownership

• Board representation vs. board control

• Analyst Sell recommendation as predictive variable

Future Publication Opportunities

• Academic Journal

• Practitioner Journal

• Legal Journal (already requested by Columbia Law Review)


Questions?

corporate governance and hedge fund activism

Documents