Activist hedge funds and firm disclosure

• Date: 01 April 2016
• Author: Jing Chen,Michael J. Jung
• Published date: 01 April 2016
• DOI: http://doi.org/10.1016/j.rfe.2015.09.004

Activist hedge funds and firm disclosure☆

Jing Chen

a

, Michael J. Jung

b,

⁎

a

Schoolof Management, Universityat Buffalo, 239 Jacobs ManagementCenter, Buffalo, NY 14260-4000,United States

b

LeonardN. Stern School of Business,New York University,44 West 4th St., New York, NY 10012-1126, UnitedStates

abstractarticle info

Articlehistory:

Received1 October 2014

Receivedin revised form 26 August 2015

Accepted28 September 2015

Availableonline 8 October 2015

JEL classification:

M41

G23

G34

Keywords:

Activisthedge funds

Shareholderactivism

Managementguidance

Disclosure

This study examines whether firms' disclosure decisions are affected by the presence of activisthedge funds.

Using a large sample of firms that experienced increases i n ownership by activist hedge funds, we find that

firmsare more likelyto cease providingfinancial guidance or reduce the information in the guidance in the quarter

subsequentto new investment by activist hedgefunds. These results holdeven for firms that experiencedgood

quartersand consistentlyprovidedguidance in previousquarters.Since guidancehas been shownto be beneficial

to capital market participants in many ways, reduced guidance has meaningful market implications. Our findings

highlight a negativeand possible unintended consequence of activist hedge funds'investment in firms, which

provides some counterbalance to the numerous positive consequencesdocumented in the prior literature on

hedge fund activism.

© 2015 ElsevierInc. All rights reserved.

1. Introduction

This study examines a possibleunintended consequence of activist

hedge funds' investment in firms—a re duction in firms' voluntary

disclosure.The prior literature onactivist hedge funds has documented

numerous positive consequ ences after their investment in firm s,

including reduced agencycosts (Brav, Jiang, Partnoy, & Thomas, 2008;

Clifford, 2008; Klein and Zur, 2009), improved corporate innovation,

productivity, and tax plannin g (Brav, Jiang, Ma & Tian, 2014; Brav,

Jiang, & Kim, 2015; Cheng, Huang, Li, & St anfield, 2012), reduced

earningsmanagement (Hall & Trombley,2012), and greater accounting

conservatism (Cheng, Huang,& Li, 2015). However, little research has

focused on governance refor ms involving disclosure pra ctices, as

evidence has been based on a small number of cases in which activist

hedge fund blockholders (wh o own N5% equity) expressly sta te in

Schedule 13D filings that they seek more informationdisclosure from

target firms (e.g., Brav et al., 2008).

1

There has also been limited evidence

of negative capital market consequences of activist hedge funds' invest-

ment in firms. We posit that, on a broader scale, a possible negative

consequence is firms' reduced likelihoodto issue public management

forecasts, also known as management guidance, after investment by

activist hedge funds.

Some institutional evidence suggests that firms reevaluate their

policies regarding guidanceas activist hedge funds begin to take initial

positions in the firms. Firmscognizant of being targeted by an activist

hedge fund or a “wolf pack”of funds (Briggs, 2007)areadvisedbynumer-

ous law firms and investment banks to regularly monitor changes in

activist hedge fund holdings and to prepare for potential confrontational

campaigns by continuously reviewing external communications policies

(Christopher & Sheng, 2007; Gelles, 2013; Lipton, 2013; Sullivan, &

Cromwell, 2013; Zenner, Gosebruch& Berkovitz, 2010). Since activist

hedge funds tend to target firms with predictable revenues and positive

cash flows (Brav et al., 2008; Klein & Zur, 2009), firms that provide

Reviewof Financial Economics 29 (2016)52–63

☆Wethank Bradford Jordan(editor), two anonymousreviewers,Tim Baldenius, Mary

Billings,Wayne Guay, April Klein, Baruch Lev,Martin Loeb, Michael Tang, and workshop

participants at New York University for hel pful comments and suggestions.We thank

Wei Jiang and her coauthors for sharing an updated list of activist hedge funds used in

Brav et al. (2008). We are gratef ul for the funding of this rese arch by New York

Universityand the University at Buffalo.

⁎Correspondingauthor.

E-mailaddresses: jchen229@buffalo.edu (J. Chen),mjung@stern.nyu.edu (M.J. Jung).

1

Section13(d) of the1934 Exchange Actmandates investorsto file with the S EC within

10days of acquiring morethan 5% of any class of securitiesof a publicly tradedcompany if

theyhave an interestin influencing themanagement of the company.Alternatively,inves-

tors may file a simpler13G within 45 days of the end of the calendar year if they do not

intendto attempt to change control of the issuer.

http://dx.doi.org/10.1016/j.rfe.2015.09.004

1058-3300/©2015 Elsevier Inc. All rightsreserved.

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe