Disentangling the effects of hedge fund activism on firm financial and social performance

• Published date: 01 June 2020
• Author: Rodolphe Durand,Mark R. DesJardine
• Date: 01 June 2020
• DOI: http://doi.org/10.1002/smj.3126

RESEARCH ARTICLE

Disentangling the effects of hedge fund

activism on firm financial and social

performance

Mark R. DesJardine

1

| Rodolphe Durand

2

1

Smeal College of Business, The

Pennsylvania State University, University

Park, Pennsylvania

2

Society and Organizations (S&O) Center,

HEC Paris, Jouy-en-Josas, France

Correspondence

Mark R. DesJardine, Assistant Professor,

Smeal College of Business, The

Pennsylvania State University,

210 Business Building, University Park,

PA 16802.

Email: desjardine@psu.edu

Abstract

Research Summary:We investigate how hedge fund

activism affects firms' financial and social performance.

So far, research has examinedeither the impact of hedge

fund activism on firms' short-term financial perfor-

mance, or how other types of shareholder activism affect

firms' social performance. Crossing these boundaries

with data on 1,324 activist hedge fund campaigns

between 2000 and 2016, we find a clear trade-off associ-

ated with hedge fund activism: benefits are shareholder-

centric and short-lived, reflected in immediate increases

in market value and profitability; however, these

increases come at a mid- to long-term cost to other

stakeholders, captured by decreases in operating cash

flow, investment spending, and social performance. We

discuss our findings from a multi-stakeholder perspec-

tive to move beyond a polarizing debate about the merits

of hedge fund activism.

Managerial Summary:With hedge fund activism on

the rise, determining the consequences of equity owner-

ship by activist hedge funds on target companies' short-

term and long-term financial and social performance

takes on central importance. In this study, we find hedge

fund campaigns are associated with three broad sets of

outcomes for targeted companies: (a) an immediate but

Received: 10 December 2018 Revised: 30 October 2019 Accepted: 27 November 2019 Published on: 5 February 2020

DOI: 10.1002/smj.3126

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or

adaptations are made.

© 2020 The Authors. Strategic Management Journal published by John Wiley & Sons, Ltd. on behalf of Strategic Management Society.

1054 Strat. Mgmt. J. 2020;41:1054–1082.wileyonlinelibrary.com/journal/smj

short-lived increase in market value and profitability,

and an immediate and long-lived decline in operating

cash flow; (b) decreases in number of employees, operat-

ing expenses, R&D spending, and capital expenditures;

and (c) the suppression of corporate social performance.

By capturing the range of positive and negative effects

on target companies, our study presents the competing

implications of hedge fund activism on business and

society.

KEYWORDS

corporate financial performance, corporate social performance,

hedge fund activism, shareholder activism, sustainability

1|INTRODUCTION

He's proposed some things that could be very dangerous to the short term, which is

reorganize the company right now, and he's proposed something very dangerous

for the long-term future of this company, and that is eliminating our corpo-

rate R&D.

—David Taylor, CEO of Procter & Gamble.

The number of activist hedge fund campaigns has increased steadily over the past two

decades, with nearly one campaign launched against a new target company every day in 2018

(Lazard, 2018). Beyond CEOs' reactions, like the one from David Taylor about hedge fund activ-

ist Nelson Peltz, intense debates in management and finance rage about the short- and long-

term consequences of shareholder activism by hedge funds. While less disagreement surrounds

the evident increases in firms' market value immediately after hedge fund campaigns (Brav,

Jiang, Partnoy, & Thomas, 2008; Clifford, 2008), questions remain whether the benefits of such

interventions by activist hedge funds extend beyond short-term shareholders to also advantage

longer-term shareholders and other stakeholders (Ahn & Wiersema, in-press). As hedge fund

activism becomes commonplace in business, determining the consequences of activist hedge

funds' ownership on firms' short- and long-term financial and social performance takes on cen-

tral importance.

We define activist ownership as an activist hedge fund taking an equity stake in a company

with the intention to influence the control or the management of the company (Brav, Jiang, &

Kim, 2015; Chen & Feldman, 2018; Gantchev, 2013; Klein & Zur, 2011). A shortcoming in prior

research has been to overlook the concurrent effects of ownership by activist hedge funds on

target companies': (a) long-term financial performance (as reflected by market performance,

accounting performance, and cash flow performance); (b) range of strategic investments; and

(c) corporate social performance (CSP).

Studies in one strand of hedge fund activism research reveal a mostly positive effect of activist

ownership on short-term financial performance indicators, suggesting that demands from hedge

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