Activist Hedge Funds : The Characteristics and Determinants of Abnormal Returns in Activist Hedge Fund Targets – an Event Study

Abstract

This thesis is a comprehensive study of the activist hedge fund phenomenon, with particular emphasis on target firm and return characteristics. The utilized sample include 3065 activist interventions in U.S. publicly traded companies from 1994 to 2013. In general, we employ different modifications of the event study framework, investigating abnormal returns in target firms caused by activist hedge fund interventions. Our analyses can, to keep contextual tidiness, be divided into four separate examinations. Their yielded results should, however, preferably be contemplated in coherence. First, we plunge into the target firm characteristics to unveil whether activist hedge funds systematically tilt their investments towards particular company features. Our results indicate that activist hedge funds on average target undervalued companies with below -average size, leverage and profitability, and above-average cash-on-hand ratios and stock liquidity. Second, we examine the short-term abnormal returns in target firms. Our findings imply statistically and economically positive abnormal returns in the days surrounding the event day, which cannot be attributed to abnormal trading volumes when looking at the overall sample. We show that these figures are significantly higher in economically stable times than in crisis. They are, however, indistinguishable for high frequency (more than ten interventions) and low frequency funds (less than five interventions). Third, we examine the long-term abnormal returns in target companies by conducting calendar- time monthly portfolio regressions. The findings unanimous imply a positive long-term abnormal return in target firms, independent of the macroeconomic conditions and the hedge fund track record. Fourth, we are the first, to our knowledge, trying to explain the cross-sectional differences in abnormal returns. We do so by specifying twelve unique models which results imply that target firm cash-to-asset ratio, market capitalization, price-to-book ratio, bid-ask spread, as well as the hedge fund’s track record and degree of friendliness in the stated tactic are statistically significant determinants of the long-term abnormal returns in target firms. With respect to the short-term abnormal returns, the overall economic state and the long-term abnormal returns are seemingly significant determinants.