Wednesday, 22 February 2017
Last updated 8 hours ago
Oct 16 2006 | 3:46pm ET
If you think that talk about hedge fund activism is all hot air, think again. Hedge funds get their way 60% of the time they make demands on companies, whether it is about capturing board seats, stopping a merger or increasing a firm’s market value, according to a new study.
Over a two-year-period, April Klein, an associate professor at New York University’s Stern School of Business, examined 155 initial Schedule 13D filings by hedge funds. In each of the filings, which are required when a shareholder owns more than 5% of a company, the hedge fund professed an intention to influence the firm’s future strategy or corporate governance.
The study showed that, when it was their stated goal, hedge funds had a 100% success rate in replacing the CEO, a 73% success rate in achieving seats on a firm’s board of directors and a 56% success rate in preventing a merger – all objectives stated in their initial 13D filings. Targeted firms earned on average 10.3% abnormal stock returns during the period surrounding the initial 13D filing, and dividends per share approximately doubled in the year following the initial stake. However, according to the study, the companies did not show improvements in accounting performances in the year after the initial purchase.
Rather, “hedge funds extract cash from the firm through increases in the target’s debt capacity and higher dividends,” the study finds.
Klein's study concludes that hedge fund managers achieve their goals by posing a credible threat of engaging the target in a costly proxy solicitation contest.