Hedge Fund Activism begins with a brief outline of the research literature and describes datasets on hedge fund activism.

We present evidence that the equity premium and the premium of value stocks over growth stocks are explained in the 1982 1996 period with a stochastic discount factor (SDF) calculated as the weighted average of individual households' marginal rate of substitution with low and economically plausible values of the relative risk aversion (RRA) coefficient. Household consumption of non-durables and services is reconstructed from the CEX database. Since the above premia are not explained with a SDF calculated as the per capita marginal rate of substitution with low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence is that a SDF calculated as the per capita marginal rate of substitution is better able to explain the equity premium and does so with a lower value of the RRA coefficient, as the definition of asset holders is tightened to recognize the limited participation of households in the capital market.

Hedge fund activism emerged as a major force of corporate governance in the 2000s. By the mid-2000s, there were between 150 and 200 activist hedge funds in action each year, advocating for changes in 200-300 publicly listed companies in the United States. In this article, we review the evolution and major characteristics of hedge fund activism, as well as the short- and long-term impacts of the performance and governance of targeted companies. Though most of the analyses here are based on a comprehensive sample of over 2,000 activism events in the United States from 1994 to 2011, hand-collected by the authors from regulatory filings and news searches, this article covers all major studies on the topic, including those on markets outside of the United States.

We test the empirical validity of a claim that has been playing a central role in debates on corporate governance -- the claim that interventions by activist hedge funds have a negative effect on the long-term shareholder value and corporate performance. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data. We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention's long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Our findings have significant implications for ongoing policy debates.

The contest between rational and behavioral finance is poorly understood as a contest over quot;testabilityquot; and quot;predictive success.quot; In fact, neither rational nor behavioral finance offer much in the way of testable predictions of improving precision. Researchers in the rational paradigm seem to have abandoned testability and prediction in favor of a scheme of ex post quot;rationalizationsquot; of observed price behavior. These rationalizations, however, have an unemphasized relevance for behavioral finance. While behavioral finance advocates may justly criticize rationalizations as unlikely to lead to a science of financial economics with improving predictive power, rational finance's explanatory power plays a key role supporting the limits of arbitrage arguments that make behavioral finance possible.

This paper studies how hedge fund activism reshapes corporate innovation. Firms targeted by hedge fund activists experience an improvement in innovation efficiency during the five-year period following the intervention. Despite a tightening in R&D expenditures, target firms experience increases in innovation output, measured by both patent counts and citations, with stronger effects seen among firms with more diversified innovation portfolios. We also find that the reallocation of innovative resources and the redeployment of human capital contribute to the refocusing of the scope of innovation. Finally, additional tests refute alternative explanations attributing the improvement to mean reversion, sample attrition, management’s voluntary reforms, or activists’ stock-picking abilities.

Hedge fund activism is a new form of arbitrage. Using a large hand-collected data set from 2001 to 2006 we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. The abnormal stock return upon announcement of activism is approximately seven percent, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. We also find large positive abnormal return to the self-reported hedge fund activists during our sample period. The abnormal return significantly exceeds the returns to all hedge funds, the returns to equity-oriented hedge funds and is robust to alternative risk adjustments and selection biases.

This paper studies the long-term effect of hedge fund activism on the productivity of target firms using plant-level information from the U.S. Census Bureau. A typical target firm improves its production efficiency within two years after activism, and this improvement is concentrated in industries with a high degree of product market competition. By following plants that were sold post-intervention we also find that efficient capital redeployment is an important channel via which activists create value. Furthermore, our analyses demonstrate that measuring performance using the Compustat data is likely to lead to a downward bias because target firms experiencing greater improvement post-intervention are also more likely to disappear from the Compustat database. Finally, consistent with recent work in asset-pricing linking firm investment decisions and expected returns, we show how changes to target firms' productivity are associated with a decline in systemic risk, particularly in competitive industries.