Shareholder coordination, investment horizon and hedge fund activism

Abstract

I examine the role of institutional investors in hedge fund activists' target selection. I argue that the coordination power and the investment horizon of institutional investors are important factors in explaining target selection. I find that hedge fund activism is higher in firms that institutional investors with long-term horizons invest as well as firms where coordination ability among existing shareholders is less pre-intervention. However, coordination ability increases after the intervention. Furthermore, hedge fund demands and success rates differ with the coordination ability and investment horizon of investors. Firms with investors that have long-term investment horizons and increased coordination ability are more likely to receive demands on board representation, value maximization and corporate governance improvements. Firm performance improvements are the most visible where institutional investors have a long horizon and where coordination among existing institutional investors increases. Overall, the results suggest that coordination ability and investment horizon of existing institutional shareholders are important factors in explaining target selection and strategies explored by hedge fund activists as well as their effects on firm value. The findings support the notion of coordination and collaborative monitoring role of long-term institutional investors with and hedge fund activists.