Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors

Abstract

We examine recent confrontational shareholder activism campaigns by hedge funds and by other private investors. The three main parallels between the groups are a significantly positive market reaction for the target firm around the initial Schedule 13D filing date, a further significant increase in share price for the subsequent year, and the activist's high success rate in gaining its original objective. The two main differences are the types of companies each group targets and the activists' post-investment strategies. Hedge funds target more profitable and healthy firms than other activists. Afterwards, hedge funds reduce the target's cash holdings by increasing its leverage and dividends paid. In contrast, other activists lower the target's capital expenditures and research and development costs. In total, we conclude that the activism benefits existing shareholders of the targeted firms, but that hedge funds and other entrepreneurial activists achieve these benefits through different outlets.