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Publication Title

Washington University Law Review

Abstract

The long-term effects of hedge fund activism are controversial. Some empirical studies document that activism is associated with increased long-term firm value, suggesting that activists can better discipline management. Other studies, however, challenge these results, arguing that the incorporation of possible selection effects exposes activism as detrimental to long-term firm value.

This Article contributes to this ongoing debate, producing novel empirical evidence on the relationship between activist campaigns, the financial value of firms, key governance arrangements, and corporate legal rules. We first document qualitative evidence that untargeted “control” firms sharing similar characteristics to targeted firms perform better in the long term than the target firms, and then show that hedge fund activism is associated with increased risk-taking but has no significant impact on managerial incentives. These combined findings provide support for the view that the substantial private gains hedge funds realize through activism come at the expense of long-term firm value, rather than from increased managerial accountability.

Consistent with these results, we further show that defensive mechanisms matter for deterring hedge fund activism only as long as they provide an effective higher-level constraint to protect a firm’s commitment to long-term value creation, such as when they are premised on shareholder consent or embedded in a managerial-friendly legal environment. This would explain why staggered boards and incorporation in states with more anti-takeover statutes can deter future activist interventions, while the poison pill, surprisingly, does not. The Article concludes with recommendations to enhance the deterrent effect of current defensive mechanisms against short-term hedge fund activism.

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