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http://hdl.handle.net/2451/25985
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| Title: | Hedge Funds in Corporate Governance and Corporate Control. |
| Authors: | Kahan, Marcel
Rock, Edward B |
| Issue Date: | Jul-2006 |
| Series/Report no.: | CLB-06-012 |
| Abstract: | Hedge funds have become critical players in both corporate governance
and corporate control. In this article, we document and examine the
nature of hedge fund activism, how and why it differs from activism by
traditional institutional investors, and its implications for corporate
governance and regulatory reform. We argue that hedge fund activism
differs from activism by traditional institutions in several ways: it is
directed at significant changes in individual companies (rather than
small, systemic changes), it entails higher costs, and it is strategic
and ex ante (rather than intermittent and ex post). The reasons for
these differences may lie in the incentive structures of hedge fund
managers as well as in the fact that traditional institutions face
regulatory barriers, political constraints, or conflicts of interest
that make activism less profitable than it is for hedge funds. But the
differences may also be due to the fact that traditional institutions
pursue a diversification strategy that is difficult to combine with
strategic activism. Although hedge funds hold great promise as active
shareholders, their intense involvement in corporate governance and
control also potentially raises two kinds of problems: The interests of
hedge funds sometimes diverge from those of their fellow shareholders;
and the intensity of hedge fund activism imposes substantial stress that
the regulatory system may not be able to withstand. The resulting
problems, however, are relatively isolated and narrow, do not broadly
undermine the value of hedge fund activism as a whole, and do not
warrant major additional regulatory interventions. The sharpest
accusation leveled against activist funds is that activism is designed
to achieve a short-term payoff at the expense of long-term
profitability. Although we consider this a potentially serious problem
that arguably pervades hedge fund activism, we conclude that a
sufficient case for legal intervention has not been made. This
conclusion results from the uncertainties about whether short-termism is
in fact a real problem and how much hedge fund activism is driven by
excessive short-termism. But, most importantly, it stems from our view
that market forces and adaptive devices taken by companies individually
are better designed than regulation to deal with the potential negative
effects of hedge fund short-termism while preserving the positive
effects of hedge-fund activism. |
| URI: | http://hdl.handle.net/2451/25985 |
| Appears in Collections: | NYU Pollack Center for Law & Business Working Papers
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