The Impact of Hedge Fund Activists: Long-Term Effects of Intervention on Firm Value and Operating Characteristics

Abstract

Given the growing power and influence of hedge fund activists I examine the long- term effects of their intervention on target firms. The primary results conclude that interventions are positive in the aggregate. However, further bifurcation reveals hedge fund activist intervention is only effective and positive in asset-heavy firms such as manufacturing companies and retailers. In contrast, intervention in human-capital based businesses typically results in decreased profitability and firm value. I then extend agency theory to explain the divergent outcomes. In summary, I confirm the potential for hedge fund activists to destroy value but conclude they generate positive shareholder value in the aggregate.