Hedge fund activism, voice, and value creation

Karpouzis, Efstathios and Bouras, Chris and Kanas, Angelos (2019): Hedge fund activism, voice, and value creation.

Abstract

We construct a novel hand-collected large data set of 205 U.S. hedge funds and 1031 activist events over the period 2005-2013, which records both the Schedule 13D filing date and the voicing date, and explore the role of voicing in value creation. We employ alternative inferential statistical approaches, including parametric, non-parametric, and heteroscedasticity-robust tests along with bootstrapping. We reveal that the voice date is important in creating short-term firm value, and provide strong evidence that voicing is associated with positive abnormal returns. These abnormal returns are approximately 1.11%, and are higher than the abnormal returns around the Schedule13D date by approximately 64%. There is also evidence of positive voice abnormal returns for voicing events which lead Schedule 13D events. The results are robust to models of abnormal returns allowing for leverage effects, and to alternative inferential statistical procedures. These findings suggest that voicing leads to information revelation, with implications for U.S. stock market arbitrage and the regulation for hedge fund activism information disclosure.

• Item Type: MPRA Paper
• Language: English
• Keywords: We construct a novel hand-collected large data set of 205 U.S. hedge funds and 1031 activist events over the period 2005-2013, which records both the Schedule 13D filing date and the voicing date, and explore the role of voicing in value creation. We employ alternative inferential statistical approaches, including parametric, non-parametric, and heteroscedasticity-robust tests along with bootstrapping. We reveal that the voice date is important in creating short-term firm value, and provide strong evidence that voicing is associated with positive abnormal returns. These abnormal returns are approximately 1.11%, and are higher than the abnormal returns around the Schedule13D date by approximately 64%. There is also evidence of positive voice abnormal returns for voicing events which lead Schedule 13D events. The results are robust to models of abnormal returns allowing for leverage effects, and to alternative inferential statistical procedures. These findings suggest that voicing leads to information revelation, with implications for U.S. stock market arbitrage and the regulation for hedge fund activism information disclosure.
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors; G - Financial Economics > G3 - Corporate Finance and Governance

References

ADMATI, Anat R.; PFLEIDERER, Paul. The “Wall Street Walk” and shareholder activism: Exit as a form of voice. The Review of Financial Studies, 2009, 22.7: 2645-2685.

ADRIAN, Tobias; ROSENBERG, Joshua. Stock returns and volatility: Pricing the shortrun and longrun components of risk. The Journal of Finance, 2008, 63, 2997-3030.

AKHIGBE, A., MARTIN, A.D. Valuation impact of Sarbanes–Oxley: Evidence from disclosure and governance within the financial services industry. Journal of Banking & Finance, 2006, 30: 989-1006.

ALGINA, James; OSHIMA, T. C.; LIN, Wen-Ying. Type I error rates for Welch’s test and James’s second-order test under nonnormality and inequality of variance when there are two groups. Journal of Educational Statistics, 1994, 19.3: 275-291.

ANG, Andrew, et al. The cross-section of volatility and expected returns. The Journal of Finance, 2006, 61:259-299.

BEBCHUK, Lucian A.; BRAV, Alon; JIANG, Wei. The long-term effects of hedge fund activism. National Bureau of Economic Research, 2015.

BECHT, Marco, et al. Returns to hedge fund activism: An international study. The Review of Financial Studies, 2017, 30.9: 2933-2971.

BECHT, Marco, et al. Returns to shareholder activism: Evidence from a clinical study of the Hermes UK Focus Fund. The Review of Financial Studies, 2008, 22.8: 3093-3129.

BEN‐DAVID, ITZHAK, et al. Do hedge funds manipulate stock prices?. The Journal of Finance, 2013, 68.6: 2383-2434.

BOLLERSLEV, Tim. Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 1986, 31.3: 307-327.

BOYSON, Nicole M.; MOORADIAN, Robert M. Corporate governance and hedge fund activism. Review of Derivatives Research, 2011, 14.2: 169-204.

BRAV, Alon, et al. The returns to hedge fund activism. Financial Analysts Journal, 2008, 64.6: 45-61.

BRAV, Alon, et al. Hedge fund activism, corporate governance, and firm performance. The Journal of Finance, 2008, 63.4: 1729-1775.

BRAV, Alon; JIANG, Wei; KIM, Hyunseob. The real effects of hedge fund activism: Productivity, asset allocation, and labor outcomes. The Review of Financial Studies, 2015, 28.10: 2723-2769.

BROWN, Stephen J.; WARNER, Jerold B. Measuring security price performance. Journal of Financial Economics, 1980, 8.3: 205-258.

K. BRUNNERMEIER, MARKUS; NAGEL, Stefan. Hedge funds and the technology bubble. The Journal of Finance, 2004, 59.5: 2013-2040.

CARHART, Mark M. On persistence in mutual fund performance. The Journal of Finance, 1997, 52.1: 57-82.

CLIFFORD, Christopher P. Value creation or destruction? Hedge funds as shareholder activists. Journal of Corporate Finance, 2008, 14.4: 323-336.

CORRADO, Charles J. A non-parametric test for abnormal security-price performance in event studies. Journal of Financial Economics, 1989, 23.2: 385-395.

CORRADO, Charles J.; ZIVNEY, Terry L. The specification and power of the sign test in event study hypothesis tests using daily stock returns. Journal of Financial and Quantitative Analysis, 1992, 27.3: 465-478.

CREMERS, Martijn, et al. Hedge fund activism and long-term firm value. 2015.

DENES, Matthew R.; KARPOFF, Jonathan M.; MCWILLIAMS, Victoria B. Thirty years of shareholder activism: A survey of empirical research. Journal of Corporate Finance, 2017, 44: 405-424.

ENRIQUES, Luca; GILOTTA, Sergio. Disclosure and financial market regulation. In The Oxford Handbook of Financial Regulation. Editors: MOLONEY, N.; FERRAN, E.; PAYNE, J. 2015.

ENGLE, Robert F. Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 1982, 987-1007.

FAMA, Eugene F.; FRENCH, Kenneth R. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 1993, 33.1: 3-56.

GILSON, Ronald J.; GORDON, Jeffrey N. The agency costs of agency capitalism: activist investors and governance rights. Columbia Law Review, 2013, 863-927.

GLOSTEN, Lawrence R.; JAGANNATHAN, Ravi; RUNKLE, David E. On the relation between the expected value and the volatility of the nominal excess return on stocks. The Journal of Finance, 1993, 48.5: 1779-1801.

GOLDSTEIN, Itay; YANG, Liyan. Information disclosure in financial markets. Annual Review of Financial Economics, 2017, 9: 101-125.

GOODWIN, Shane. The Long-Term Efficacy of Activist Directors. 2016.

GOW, Ian D.; SHIN, Sa-Pyung; SRINIVASAN, Suraj. Activist directors: Determinants and consequences. 2014.

GREENSTONE, Micheal, OYER, Paul, VISSING-JONGERSEN, Annette. Mandated disclosure, stock returns, and the 1964 Securities Acts Amendments. Quarterly Journal of Economics. 2006, May:399-460.

GREENWOOD, Robin; SCHOR, Michael. Investor activism and takeovers. Journal of Financial Economics, 2009, 92.3: 362-375.

GRIFFIN, John M.; XU, Jin. How smart are the smart guys? A unique view from hedge fund stock holdings. The Review of Financial Studies, 2009, 22.7: 2531-2570.

GUO, Jiin-Huarng; LUH, Wei-Ming. An invertible transformation two-sample trimmed t-statistic under heterogeneity and nonnormality. Statistics & Probability Letters, 2000, 49.1: 1-7.

HALL, Peter. On the removal of skewness by transformation. Journal of the Royal Statistical Society. Series B (Methodological), 1992, 221-228.

KEDIA, Simi; STARKS, Laura; WANG, Xianjue. Institutional investors and hedge fund activism. Working Paper, 2016.

KESELMAN, H. J., et al. The new and improved two-sample t test. Psychological Science, 2004, 15.1: 47-51.

KLEIN, April; ZUR, Emanuel. Entrepreneurial shareholder activism: Hedge funds and other private investors. The Journal of Finance, 2009, 64.1: 187-229.

KOLARI, James W.; PYNNÖNEN, Seppo.Event study testing with cross-sectional correlation of abnormal returns. The Review of Financial Studies, 2010, 23.11:3996-4025.

KRISHNAN, C. N. V.; PARTNOY, Frank; THOMAS, Randall S. The second wave of hedge fund activism: The importance of reputation, clout, and expertise. Journal of Corporate Finance, 2016, 40: 296-314.

KYLE, A. S.Continuous auctions and trading, Econometrica, 1985, 53: 1315–1336

LUNDBLAD, Christian. The risk return tradeoff in the long run: 1836–2003. Journal of Financial Economics, 2007, 85.1: 123-150.

MAHONEY, Paul G., The Exchange as Regulator, Virginia Law Review, LXXXIII. 1997, 1453–1500.

MARGINSON, David; MCAULAY, Laurie. Exploring the debate on short‐termism: a theoretical and empirical analysis. Strategic Management Journal, 2008, 29.3: 273-292.

NELSON, Daniel B. Conditional heteroskedasticity in asset returns: A new approach. Econometrica: Journal of the Econometric Society, 1991, 347-370.

OSTROVSKY, Michael. Information aggregation in dynamic markets with strategic traders. Econometrica. 2012, 80,6:2595-2647.

PACCES, Alessio M. Exit, Voice and Loyalty from the Perspective of Hedge Funds Activism in Corporate Governance. Erasmus L. Rev., 2016, 9: 199.

PALMITER, A. Mutual Fund Voting of Portfolio Shares: Why Not Disclose?', 2002. Cardozo Law Review, 23: 1423, 1477.

PALMITER, Alan R., Toward Disclosure Choice in Securities Offerings, Columbia Business Law Review, 1999. 1–135.

ROMANO, Roberta, Empowering Investors: A Market Approach to Securities Regulation,” Yale Law Journal, CVII, 1998. 2359 –2430.

ROSENBLUM, Steven A. Hedge Fund Activism, Short-Termism, and a New Paradigm of Corporate Governance. Yale LJF, 2016, 126: 538.

RUXTON, Graeme D. The unequal variance t-test is an underused alternative to Student's t-test and the Mann–Whitney U test. Behavioral Ecology, 2006, 17.4: 688-690.

SUOMINEN, Matti. Trading volume and information revelation in stock market. Journal of Financial and Quantitative Analysis, 2001, 36.4: 545-565.

WELCH, Bernard L. The generalization of student's' problem when several different population variances are involved. Biometrika, 1947, 34.1/2: 28-35.

WILCOXON, Frank. Individual comparisons by ranking methods. Biometrika, 1945,1.6: 80-83.

WILCOX, Rand R, Introduction to Robust Estimation and Hypothesis Testing. San Diego, CA: Academic Press, 1997.

YUEN, Karen K. The two-sample trimmed t for unequal population variances. Biometrika, 1974, 61.1: 165-170.