Influences of Hedge Fund Activism on the Medium Term Target Firm Value

Abstract

In this study, the 'new' phenomenon of hedge fund activism is examined by testing the effects of 188 hedge fund activism events from Europe and North America. For all events it was measured what the effects were after the initial investment and the first action by the hedge fund, with the goal to research if these effects resulted in a value increase on the target firm value. On a short term period surrounding the initial filing by an activist hedge fund, there were found significant abnormal returns in the range of 9,5% to 12,19%, in both Europe and North America.

Also, on a 6-month window significant positive abnormal returns were found, indicating that the involvement of a hedge fund activist created value also on a longer term.

Furthermore, in the 20 days surrounding the initial activism, results showed a statistically significant abnormal return of 5,59%. After 6 months, this effect decreased a little and was not significant anymore. This decrease was mainly due to the events in Europe, that were less successful and reported no significant effects on the medium term. In contrast, in North America, on the medium term there were found (though not significant) even larger positive abnormal returns.

Overall, the investments of activist hedge funds lead to an increase in shareholder value for the targeted firms. Activist hedge funds can be described as value investors that try to increase shareholder value by certain actions. The presented evidence in this research indicates that they are often successful in this strategy and thus create an increase in firm value on both the short and medium term.

Keywords: Hedge fund activism, hedge fund activism Europe, European hedge fund activists, hedge fund activists study

JEL Classification: G24