The Effects of Hedge Fund Activism on Performance:
Evidence from Germany
Joshua-Roman Vollstedt*
Supervisor: Professor Dr. Wolfgang Bessler
Master thesis, MSc. Finance January 12th, 2017
University of Groningen Faculty of Economics and Business
Abstract
Previous research on U.S. hedge fund activism asserts that activism positively affects short-term and long-short-term shareholder value creation. This thesis examines the effect of hedge fund activism on performance in Germany using a sample of 168 activist hedge fund interventions covering 107 target firms and 84 hedge funds in the period from 2007 to 2014. Using event study methodology, the short and long-term effects of hedge fund activism on shareholder value creation during and after the financial crisis of 2007 have been analysed. In contrast to previous research based on activism in the U.S., the analyses of activist hedge funds in Germany reveal that activism only contributes to short-term value creation under favourable market conditions. Further, this study finds positive effects on long-term value creation after the financial crisis, whereas value creation during the crisis is significantly negative. This study challenges the notion that hedge fund activism creates short- and long-term shareholder value and suggest that more research will be necessary to separate true activist value creation from mere economic fluctuations.
Table of Contents
1. Introduction ... 3
2. Literature Review ... 4
A. Shareholder and the agency problem ... 4
B. Shareholder activism and activist hedge funds ... 5
C. Characteristics of target companies ... 6
D. Does hedge fund activism generate short-term shareholder value? ... 7
E. Long-term effects of hedge fund activism on target firms ... 7
F. Research on hedge fund activism outside the U.S. ... 8
G. Hedge fund activism in the German environment ... 9
H. Hypotheses ... 10
3. Data and Methodology ... 10
A. Data Selection ... 10
B. Sample Characteristics ... 12
B.1. Public activism of a hedge fund in Germany: the case of Demag Cranes AG ... 13
C. Methodology ... 14
D. Descriptive statistics of target firms ... 16
4. Results ... 17
A. Short-term effects and abnormal trading volume ... 17
B. Long-term effects of hedge fund activism ... 20
B.1. Buy-and-hold abnormal returns ... 20
B.2. Calendar-time portfolios ... 22
B.3. Cross-sectional regression ... 24
5. Summary ... 27
References ... 30
1. Introduction
“There’s good activism and bad activism. Of course, there are quite a few companies that aren’t run
well (…). It’s logical for shareholders to say they’re not happy about that. Companies should react. But there’s also a group of activist hedge fund figures who have made a very profitable business for themselves from their so-called activism. Their thing isn’t pointing out poorly run companies. They track down companies that they can force to buy back shares, split off a division, decimate capital expenditures and budgets for research and development, and reduce employment. The only objective is to drive up the market value (…). There’s no long-term value creation.”
Martin Lipton, Lawyer and inventor of the poison pill strategy1
Recently, shareholder activism has raised increasing media coverage as well as attention in academia and has become one of the most dynamic investment strategies across global financial markets. Shareholder activism is often performed by a specific group of hedge funds classified as ‘activist’ that target firms they perceive as undervalued or uneconomically operated. Activist hedge funds suggest capital, managerial, or operational changes and often claim to enhance corporate governance policy.
According to recent industry reports the total estimated assets under management (AUM) at activist hedge funds boomed in the last decade from $ 29.2 billion to around $122.9 billion in 2005 and 2015, respectively. After the financial crisis, the AUM have increased at a compound annual rate of 21.3% from 2010 to 2015.2 Cases of hedge fund activism have emerged globally and activist hedge funds have spread their geographic coverage beyond North American firms to European and Japanese companies, in particular.
Especially in Germany hedge fund activism is on the rise and recent cases include prominent targets such as Adidas AG, ThyssenKrupp AG and Volkswagen AG. As illustrated by Martin Lipton’s comment above, the strategies of activist hedge funds are critically discussed and activist hedge funds are frequently blamed for detrimental and ‘myopic activism’ against their target firms. They are accused of increasing short-term shareholder value at the expense of the long-term value creation, impairing corporate performance, and having a short-term orientation rather than a long-short-term investment horizon. Despite such criticism, empirical research based on hedge fund activism in the United States contradicts the claim of hedge funds as ‘myopic activist’ (Bebchuk et al., 2015). On the contrary, activist hedge funds appear to have
1 See: van der Marel, (2015) , Interview in Het Financieele Dagblad
2 See: Figure A.1 (Appendix) and the industry report ‘The 2016 Proxy Season’ by J.P. Morgan, August 2016.
special knowledge to achieve their objectives and succeed in generating shareholder value (Bebchuk et al., 2015; Brav et al., 2008).3
Whereas research on shareholder activism in the U.S. is abundant, there is only limited research on hedge fund activism outside the U.S. Especially countries like Germany, in which the governance system deviates substantially from the Anglo-Saxon model, provide particularly interesting cases to study hedge fund activism. In stark contrast to previous research on hedge fund activism, there are also voices who claim that activism in Germany is doomed to fail. For instance, The Wall Street Journal notes that “Activists generally understand that confronting Germany’s listed firms head-on will fail. “ 4 Hence, this thesis seeks to critically scrutinize the claim that interventions by activist hedge funds have a negative impact on target firm’s performance. Specifically, the key objectives of this thesis are to investigate the short-term and long-term reaction to the announcement of hedge fund activism with the calculation of abnormal returns and to study the cross-sectional differences in abnormal returns in Germany. The remainder of the thesis is structured as follows. Chapter 2 reviews the literature on shareholder activism as well as activist hedge funds, and develops the hypotheses to be tested. Chapter 3 depicts the data collection method, event and target firm characteristics, and the event study methodology. Chapter 4 includes all analyses of short and long-term effects of hedge fund activism on performance while Chapter 5 provides a summary and discussion of the results.
2. Literature Review
A. Shareholder and the agency problem
Agency problems exist in almost every corporation where ownership of and control over the firm are divided between different parties. Conflicts of interest arise between the principal (i.e., the owner) and the agent (i.e., the management) if owners’ and management’s interest are not aligned and therefore frequently bear significant agency costs (Jensen and Meckling, 1976). Consequently, the separation of ownership and control can diminish the shareholder value. Incentivising the firm’s management through managerial ownership (e.g., in form of stock options) or compensation schemes is one way to align management’s interest, mitigate these agency costs and to enhance shareholder value. Another crucial way to align management’s
3 Specifically, research on U.S. targets examines 13D filings that include the item 4 “purpose of transaction”,
common purposes are: board control and representation, enhance corporate governance, oppose a merger, vote stockholder proposal, maximize shareholder value.
4 See “Activist Hit Block on German Boards “, The Wall Street Journal, October 26, 2015. Retrieved from:
and shareholders’ interest is by means of active monitoring of the management by shareholders (e.g., activist hedge funds).
However, while decreasing agency costs, shareholder activism comes at considerable private costs for activist investors. Gantchev (2013) estimates that costs related to public hedge fund activism consume 66 percent of activist gross returns. On top of that, activist investors are confronted with free-rider problems since all shareholders can benefit from their activist campaigns (Grossman and Hart, 1980). Still, large shareholders, such as activist hedge funds, are particularly suitable for active monitoring and to overcome the free-rider problem (Shleifer and Vishny, 1986).
B. Shareholder activism and activist hedge funds
Shareholder activism is not a new phenomenon, U.S. financial institutions such as insurance companies, banks, mutual funds and public pension funds and some corporate raiders have been increasingly engaging in non-confrontational activism since the 1980s. Their activism has occurred with the rise of institutional ownership in U.S. stocks (Gillan and Starks, 2007). Becht et al. (2010a, p. 3094) describe shareholder activism as “a range of actions taken by shareholders to influence corporate management and boards”. Gillan and Starks (1998, p. 3) define shareholder activism as a “continuum of responses to corporate performance” and shareholder activists as investors “who try to change the status quo through ‘voice’, without a change in control of the firm”. At one end of this continuum, shareholders can sell their position (i.e., ‘vote with the feet’). The other end of the continuum comprises the market for corporate control, where activist shareholders compete for control rights and facilitate changes in the corporate structures through buyouts and takeovers (Gillan and Starks, 1998). In between, there are, in most cases, activist block holders with a minor stake and the intention to improve decision-making.
under low regulation and registration rules which enable them to use financial leverage and derivatives, to lock-up invested capital, and to concentrate their investments on a small number of companies to exert influence (Brav et al., 2008). Most of the hedge fund interventions include the acquisition of a significant stake to act as a block holder (Becht et al., 2010b; Brav et al., 2008).
In contrast to traditional investors, hedge fund managers face less conflicts of interest because they usually do not manage targets’ pension funds (Brav et al., 2008) and are better aligned with investor objectives (Boyson and Mooradian, 2011). Therefore, activist hedge funds are more qualified than other institutional investors to monitor and influence their target firms, to reduce agency costs and to generate shareholder value from activist campaigns (Bratton, 2007; Brav et al., 2008; Clifford, 2008). According to Brav et al. (2008) hedge funds become active based on motives including the maximization of shareholder value due to general undervaluation, change in the pay-out policy or capital structure, business strategy, sale of the target company, and to enhance corporate governance. Further, hedge fund tactics can differ substantially from friendly to hostile. Activist hedge funds often exert public activism in a ‘wolf pack’ collectively with other shareholders (Coffee and Palia, 2016). Recently, research on shareholder activism captures the industry growth of activist hedge funds and especially examines the effects of hedge fund activism on target firms.
C. Characteristics of target companies
Several recent studies agree on the existence of relationships between hedge fund activism and target firm characteristics at the time of activism. In comparison to industry and control groups, activist hedge funds tend to target smaller sized companies. Moreover, activists target mainly undervalued firms with underperforming stock prices and a low book-to-market variable (Bebchuk et al., 2015; Brav et al., 2009; Brav et al., 2008; Clifford, 2008; Greenwood and Schor, 2009). On the contrary, Klein and Zur (2009) state that activist targets are significantly well-performing stocks. Targeted firms have low sales growth in terms of prior accounting measures, but are more profitable based on their return on assets (ROA) (Boyson and Mooradian, 2011; Brav et al., 2008). In addition, most of the research agrees that target firms have a higher degree of institutional ownership (Appel et al., 2016; Brav et al., 2008; Gantchev, 2013), but is rather inconclusive in terms of target firms’ cash-to-asset, leverage and pay-out ratios.
structure of target firms. According to Appel et al. (2016) highly passive ownership structures (i.e., passively managed mutual funds) do not facilitate the general likelihood of an activist attack, but determine the nature of activism campaigns (e.g., hostile vs. friendly) and improve the probability of success in case of activism. Further, passive ownership increases the likelihood of various expensive activist strategies such as board representation campaigns, director nomination and proxy fights.
D. Does hedge fund activism generate short-term shareholder value?
Prior empirical research studied short-term abnormal returns around the announcement date of hedge fund activism or the initial filing day of a schedule 13D. Brav et al. (2008) report non reversal abnormal returns of 7.2 percent during their (-20, +20) announcement window from 2001 to 2006. Further, they find positive abnormal returns of about 3.2 percent between 10 days prior to 1 day before the filing. Bebchuk et al. (2015) confirm positive announcement returns of approximately 6 percent during the same (-20, +20) window between 1994 and 2007. Further research found positive average abnormal announcement return of hedge fund activism from 3.39 percent to 8.1 percent for various event windows (e.g., Boyson and Mooradian, 2011; Clifford, 2008; Greenwood and Schor, 2009; Klein and Zur, 2009). Krishnan et al. (2016) document that positive abnormal announcement returns of 7.17 percent during the (-10, +10) window also exist in more recent interventions between 2008 and 2014.
Overall, these results provide evidence for positive abnormal returns around activism announcements in U.S. listed firms.
E. Long-term effects of hedge fund activism on target firms
Empirical research on the long-term effect of hedge funds activism on target firms’ performance is inconclusive. However, there are some observable tendencies to mention.
and Schor, 2009; Klein and Zur, 2009) found no evidence that hedge fund activism is followed by performance improvements.
Further, activist hedge funds significantly increase leverage (Klein and Zur, 2009) and reduce agency costs at targeted firms (Brav et al., 2008; Clifford, 2008). Some studies concur that hedge fund activism supports pay-out increases (Brav et al., 2008; Klein and Zur, 2009; Zhu, 2013). Hedge fund activism also has an effect on other corporate operations and outcomes, such as innovation (Brav et al., 2016), product markets (Aslan and Kumar, 2016), mergers (Boyson et al., 2016), labour productivity (Brav et al., 2015), firm disclosure (Chen and Jung, 2016), and bondholders (Klein and Zur, 2011).
F. Research on hedge fund activism outside the U.S.
As mentioned above, the research on hedge fund activism focuses on interventions within the U.S. However, also seminal evidence is available for activism outside the U.S. Becht et al. (2010a) conducted a clinical study of private engagements by the Hermes UK focus fund from 1998 to 2004 and document that activism mainly focuses on corporate restructuring and board changes. These activities result in employee reduction and a smaller size of assets. In contrast to prior research, they report negative announcement returns, but positive disclosure effects of the engagement outcomes on the stock price. In another paper Becht et al. (2015a) focus on private hedge fund activism in Europe between 1997 and 2008 instead of public activism, and assert that private activism resembles public activism.
Bessière et al. (2011) did a French clinical study from October 2006 to May 2008. In a more general study, Becht et al. (2010b) focus on 305 public and private activist interventions from 2000 to 2008 in Europe and report abnormal announcement returns of 6.9 percent in the (-20, +20) window, in line with research on U.S. activism above (e.g., Brav et al., 2008). However, positive announcement returns varied significantly per country. The authors found abnormal returns ranging from a minimum of -0.82 percent (The Netherlands) to a maximum of 15.83 percent (Switzerland). For Germany, they observe positive abnormal announcement returns of 6.09 percent.
positive abnormal short-term announcement returns, but differ substantially across countries. More research on hedge fund activism outside the U.S. is available for Germany. Achleitner et al. (2010) found hedge fund activism in German firms without a large stockholder. Moreover, hedge funds invest to enhance corporate governance and are inclined to follow short-term strategies, such as increasing dividends, which are linked to free cash flow problems. More research on hedge fund activism in Germany (Bessler et al., 2015; Mietzner and Schweizer, 2014) documents positive announcement returns. In comparison to U.S. activism, the announcement returns in Germany are also positive but indicate that the stock price reaction is less pronounced.
In contrast to research on U.S. activism, hedge funds do not generate shareholder value by reducing agency costs in Germany (Mietzner and Schweizer, 2014). The study by Weber and Zimmermann (2013) relates to the disclosure process of hedge fund interventions in Germany from 2005 to 2008. They report a strong positive information effect on the transaction and publication date. Bessler et al. (2015) found improved short and long-term shareholder value in Germany after hedge fund interventions. Moreover, they provide evidence that the aggressive approach of activism underperforms non-aggressive hedge funds.
G. Hedge fund activism in the German environment
the increasing role of proxy advisory firms have contributed to the trend of rising activist hedge fund involvements in Germany (Bessler et al., 2015).5
H. Hypotheses
Literature on hedge fund activism predominantly focuses on public activism in the U.S. and time spans before the emergence of the financial crisis. To address this lack of evidence on hedge fund activism during the financial crisis, my sample of German target firms covers the period from January 01, 2007 to December 31, 2014. Including the period of the financial crisis contributes to a clear assessment of whether activist hedge funds generate shareholder value in different market conditions.
First, in line with most of the discussed literature, I hypothesize that hedge fund activism in Germany generates positive short-term abnormal returns around the disclosure date over the entire sample period. Nevertheless, I expect that the different market conditions (i.e., upward-market and downward-upward-market periods) might affect these returns significantly. Specifically, I hypothesize that during the up-market period hedge funds generate positive short-term returns, whereas these short-term returns might be negative during the years of the severe financial crisis. Second, the existence of general rumours of a hedge fund involvement may cause a significant abnormal price run-up in the days before the activism event. In addition to a price run-up, I expect to observe higher abnormal trading volumes around the announcement date.
Third, in line with most of previous research, I expect that hedge fund activism generates long-term positive shareholder value over the entire period. However, their long-term value generation is hypothesized to be significantly lower during the financial crisis as opposed to the up-market period after the crisis. Last, I hypothesize that the cross-sectional differences in short-term and long-term cumulative abnormal returns are explainable from firm characteristics (e.g., largest shareholder and size) and valuation measures.
3. Data and Methodology
A. Data Selection
Since a central database for hedge fund activism in Germany is not available, the events of hedge fund activism were collected manually based on extensive shareholder history and news screening and were matched with disclosure dates of voting rights of the identified target firms. The event search contains all firms listed in the German stock market index CDAX
5 Proxy advisory firms often support strategies pursued by activist hedge funds and improves the success of
(Composite DAX) between January 1, 2007 and December 31, 2014. The CDAX includes all price developments of stocks traded on the Frankfurt Stock Exchange across general standard and prime standard market segments.6 Further, I included all events above the disclosure threshold. The disclosure rules of shareholding in Germany pursuant to §21 WpHG (the German Securities Trading Act) require the shareholder to issue a notification if the 3% threshold of total voting rights is reached or exceeded. The shareholder must notify the issuer and the German supervisory authority.
First, the complete history of shareholders above the 3% disclosure threshold within the sample period was retrieved from Orbis by Bureau van Dijk for all CDAX constituents. This list was screened for all hedge funds. I used academic and press articles as well as company web sites and general web search to verify whether the shareholders are hedge funds, or whether the investor is attributable to other investment strategies (e.g. private equity, pension fund).
Second, news data was gathered from LexisNexis Academic, comparable to the approach of Bessler et al. (2015). LexisNexis Academic was screened for articles containing the identified hedge funds and their target firms to control for activism. I classified hedge funds as activist if the fund has exerted any form of public activism in one target firm, or when the fund is described as activist in academic or press articles. Once a hedge fund was identified as an activist, I included all share disclosures of this fund in my sample. Afterwards LexisNexis Academic search was extended to all CDAX firms in consideration of news articles containing the company name in combination with one of the terms ‘hedge fund’, ‘activism’ or ‘activist’ within 50 words and the same terms in German language to gather more events.
Third, all identified events were matched with the disclosure date of voting rights pursuant to §26 of the WpHG. This public database is provided by DGAP (EQS Group AG) and contains issuer, name of shareholder, and threshold size and date.7 The first identified disclosure dates were used as initial event date. I excluded all events below the disclosure threshold of 3% for a clearly matched event date. Additionally, I excluded all events with an initial share disclosure prior to 2007.
Finally, I did not include events around the initial public offerings (IPOs) where the target firm stock has been listed on the market for less than 140 trading days. In contrast to prior research, I decided to include events related to a subsequent mergers and acquisition (M&A) activity because most of the events are attributable to public activism to gain acquisition arbitrage. To construct the control group, I selected all two-digit SIC industry peers included in
6 See: Deutsche Börse Online Glossary, retrieved from
http://deutsche-boerse.com/dbg-en/about-us/services/know-how/glossary/glossary-article/CDAX/2560202
the German DAX, MDAX, SDAX and TecDAX indices. A prior control group consisting of all industry peers included in the CDAX benchmark was rather misleading based on several illiquid constituents. I retrieved all financial data on target and control firms from the Compustat global database, and all stock data from Thomson DataStream.
B. Sample Characteristics
The final sample consists of 168 hedge fund activism events between January 1, 2007 and December 31, 2014. The activism events cover 107 target firms and 84 hedge funds. Among the hedge funds Absolute Capital Management and Elliott Capital Advisors were the most active with 10 and 8 share disclosures, respectively. Other prominent activist hedge funds in the sample are Cevian Capital and Wyser-Pratte Management. Most of the 84 activist hedge funds have targeted only one company in Germany. As displayed in Table A.1 (Appendix), 34 activists disclosed stakes in more than two targets.
Overall, activist hedge funds have exerted public activism in 30 events. Hedge fund activism in Germany noticeably declined after the outburst of the financial crisis, which contradicts the described increase of AUM in activist funds. Most of the activist interventions took place during the down-market at the beginning of the sample period. Figure 1 shows the event distribution and the CDAX performance index.
Figure 1: Event distribution of hedge fund activism
For subsequent analyses, I used three different Panels. Panel A includes all 168 events over the full sample period. Further, I divided the full sample into two subsamples. Panel B contains 104 events that are in the down-market period between Q1 2007 and Q4 2008, whereas
Panel C includes 64 activism events that are in the up-market period between Q1 2009 and Q4 2014. Table A.2 (Appendix) shows the dispersion of the target firms’ industries membership by 2-digit SIC codes and indicates that most firms in the full sample are clustered in the manufacturing, transportation & public utilities and services industry. In total, more than 78% of all events are clustered in these three industries. This pattern is also discernible in the subpanels B and C. Nevertheless, activist hedges fund targeted more firms in the finance, insurance and real estate sector during the down-market period.
B.1. Public activism of a hedge fund in Germany: the case of Demag Cranes AG Only in some of the events activist have exerted public activism on target firms. Weber and Zimmermann (2013) have already reviewed the most confrontational hedge fund activism case in Germany of CeWe Color AG.
Another prominent public activist campaign is the case of Cevian Capital (subsequently referred to as Cevian) at Demag Cranes AG which started in 2010. Cevian is a Swedish activist hedge fund and has become one of the key promoters of activism in Germany. Public campaigns in my dataset include their investments in target firms such as Bilfinger SE, Munich Re AG and ThyssenKrupp AG.
As a market leader, Demag Cranes manufactures industrial and port cranes in 16 countries and operates in more than 60 countries worldwide. In the fiscal year 2008/2009 before the initial disclosure, Demag Cranes had a revenue of mEUR 1,047.6, was profitable over years, employed around 6,000 people, and had a medium size market capitalisation of mEUR 519.6. Since the end of the private ownership by the U.S. private equity investor KKR and the IPO in 2006, Demag Cranes was held in free float, without any block holder.
On May 21st 2010, Cevian disclosed to hold 10.07% of the voting rights in Demag Cranes AG and became the largest shareholder of the company. At the end of the day, Demag’s shares were traded at EUR 24.58. The first press release welcomed Cevian as ‘reliable and experienced shareholder’. Cevian announced to pursue a strategy of industrial value enhancement, to support the management board and do not intend to acquire a blocking minority.8 Hence, the initial information of this case suggests that Cevian started with a friendly rather than hostile approach of activism.
After the public disclosure of voting rights, Demag Cranes received several indications of takeover interest from foreign companies in October 2010. However, the management and
supervisory board announced this was not in the interest of the company.9 It had become clear that Cevian tried to increase shareholder value through pushing Demag Cranes into merger talks. Shortly after, the second activist hedge fund Centaurus Capital disclosed a 3.37 percent share on October 14th, 2010.
On October 22nd 2010, the activism of Cevian became public and Jens Tischendorf, partner at Cevian replaced a board member with immediate effect.10 This indicates the strategy of Cevian to gain a seat on the supervisory board to directly communicate with the management and other stakeholders. In February 2011, the second activist Centaurus Capital started to force Demag Cranes publicly into merger talks.
On May 2nd 2011 the American industrial Terex Corporation made a hostile tender offer for all shares at EUR 41.75 per share. Both activist hedge funds publicly rejected the offer as too low and closed their investment later in June 2011 at an increased offer of EUR 45.50 per share. After the disposal of shares Cevian left the supervisory board in September 2011.
Overall, hedge fund activism at Demag Cranes increased the targets’ value for shareholders significantly. Through gaining a board seat and support for a merger Cevian caused positive effects of hedge fund activism in Germany.
C. Methodology
In research on activist hedge funds, standard event study methodology is used to analyse the effect of activist interventions on prices, value generation and target characteristics. Following Bessler et al. (2015), the first measure that I calculated is the abnormal trading volume to assess the trading activity around hedge fund activism disclosure dates. Furthermore, the trading volume is the basis to determine a normal trading period for an estimation of the market model parameters. The abnormal trading volume (𝐴𝑉#,%) of target firm stock i at time t is:
𝐴𝑉#,% = 1 𝑉#,% 60 -./012-./30 𝑉
#,-−1
where the trading volume 𝑉#,% of each target company is divided by the average trading volume during a normal volume period from 140 to 81 days prior to the activism disclosure.
A standard method to study the short-term abnormal performance of hedge fund activism is the calculation of abnormal returns around the event date (t=0). The abnormal returns (𝐴𝑅#,-) of a target company (i) on a day in the event window (t) isolates the effect of
9 See: Demag Cranes AG annual report 2009/2010
activist interventions from returns that can be explained by market returns (𝑅8,-) of the benchmark index CDAX and is:
𝐴𝑅#,- = 𝑅#,-− 𝛼# + 𝛽# × 𝑅
8,-where 𝛼# and 𝛽# stand for model parameters estimated by OLS regressions based on the estimation window. The estimation window includes 60 daily returns prior to the event from t=-140 and t=-81 and estimates the market model parameters. There is no overlap between the reported event windows and the described estimation window.
A standard measure to aggregate the abnormal returns is the cumulative abnormal return (CAR) approach with the abnormal return of each target firm within the event window:
𝐶𝐴𝑅# 𝜏0, 𝜏? = 𝐴𝑅#,% -@
%.-A
where 𝐴𝑅#,% represents the abnormal return of target company (i) on a day in the event window (t). To expand the CAR approach to the complete sample, all target firms are aggregated to the equally weighted cumulative average abnormal returns (CAAR):
𝐶𝐴𝐴𝑅# 𝜏0, 𝜏? = 1
𝑁 𝐶𝐴𝑅# 𝜏0, 𝜏? C
%.-A
To determine the long-term effect of hedge fund interventions I calculated the average buy-and-hold abnormal returns (BHAR):
𝐵𝐻𝐴𝑅 = 1 𝑁 1 + 𝑅#,% − 1 + 𝑅8,% F %.-A F %.-A C #.0
where the mean BHAR is the difference between the realized average buy-and-hold returns of all target stocks and the average buy-and-hold returns of the market index. The used market index is as above the German CDAX index.
To assess if hedge fund activism facilitates long-term value creation in target firms the calendar-time portfolios are constructed. The calendar-time portfolio approach tests if firms targeted by activists earn abnormal returns that are not explained by risk factors of multifactor models. Consequently, the three-factor model (Fama and French, 1993) is used:
D. Descriptive statistics of target firms
To investigate the relationship between hedge fund activism and target firm characteristics, Table 1 reports the descriptive statistics of all target firms. In comparison to the control group, firms subject to hedge fund activism in Germany are on average smaller in terms of their size (total assets) and the market capitalization. Activist hedge funds tend to target smaller firms mainly to be able to act as a significant block holder (see e.g., Brav et al., 2008).
Target firms have an average (median) market capitalization of EUR 1.59 billion (EUR 0.39 billion) and the market capitalization is clearly driven by some large-cap companies within the sample (e.g., DAX constituents). Furthermore, activist hedge funds invest into firms with lower market-to-book ratios and lower Tobin’s Q ratios compared to their industry peers, indicating a general undervaluation of target firms. This evidence is consistent with most of the empirical literature (Brav et al., 2008; Klein and Zur, 2009), but contradicts with higher market-to-book ratios in Germany which have been found by Bessler et al. (2015).
Table 1:
Descriptive statistics – hedge fund targets and industry peers
This table shows the descriptive statistics of the 168 events of hedge fund activism in Germany. See Table A.2 for detailed definitions of all variables. The ratios of capital intensity, capex-to-sales, cash-flow, cash-holdings, leverage, lnsize, payout, r&d intensity, roa, roa, total assets and TobinQ reflect the values form the last balance sheet before the event date. Whereas, the market-to-book ratio and market capitalization are based on the corresponding COMPUSTAT Global items in the quarter prior to the event. Control firms include all two-digit SIC industry peers included in the German DAX, MDAX, SDAX, TecDAX benchmark between January 2007 and December 2014.
All Events (Panel A) Control firms
Mean Median Std. Dev. Mean Median Std. Dev.
Capital Intensity 0.037 0.000 0.048 0.045 0.039 0.020 Capex-to-sales 0.044 0.031 0.039 0.056 0.042 0.040 Cash-flow 0.080 0.100 0.107 0.082 0.091 0.043 Cash-holdings 0.188 0.100 0.195 0.155 0.148 0.061 Leverage 0.190 0.200 0.207 0.209 0.174 0.124 LnSize 6.395 6.200 1.995 7.118 6.954 1.219
Market Cap (in m€) 1,592.960 389.700 3,745.454 4,418.097 3,099.865 4,872.775
Market-to-book 2.163 1.600 1.977 2.747 2.461 1.407
Payout 0.698 0.100 3.041 0.356 0.262 0.519
R&D intensity 0.024 0.000 0.060 0.024 0.022 0.021
Return on assets (ROA) 0.101 0.100 0.106 0.122 0.121 0.040 Return on equity (ROE) 0.174 0.100 0.206 0.188 0.139 0.176 Total Assets (in m€) 7,043.428 497.500 30,483.635 11,183.881 1,626.438 3,3780.444
TobinQ 1.640 1.300 0.997 1.795 1.705 0.619
of this variable shows that target firms exhibit lower dividend levels than their peers. In combination with higher cash-holdings of target firms, hedge funds might aim at share repurchases or increasing dividend payments at the target firm to reduce the free cash flow agency costs (Jensen, 1986). In terms of the capital structure, this impression is also supported by lower levels of leverage that enables hedge funds to restructure target firms’ balance sheets.
Overall, most of the target firms tend to be good candidates for hedge fund activism and to reduce the agency costs of free cash flow.
4. Results
A. Short-term effects and abnormal trading volume
To investigate the short-term market reaction to the share disclosure of activist hedge funds in Germany, I computed the cumulative abnormal returns (CARs) for the entire period (Panel A), down-market (Panel B) and up-market periods (Panel C). Table 2 reports significant average CARs for various event windows.
Table 2:
Short-term disclosure returns
This table shows the mean cumulative abnormal returns (CARs) for all three Panels A, B and C. The full sample A between January 1, 2007 and December 31, 2014 is divided into 2 subsamples B and C. Panel B covers the down-market period from Q1 2007 to Q4 2008, whereas Panel C covers the up-market period from Q1 2009 to Q4 2014. The intervals are the number of days around the event date of the initial hedge fund block disclosure. All returns are calculated in excess of the German CDAX index. Significance at the 10%, 5%, and 1% levels is indicated by *, ** and ***, respectively.
Panel A (N=168) Panel B (N=104) Panel C (N=64)
Mean CAR t-test Mean CAR t-test Mean CAR t-test
Intervals around the event
(-80; +80) 5.63%** (2.1796) 1.37% (0.4449) 12.54%*** (2.7429) (-20; +20) 3.32%** (2.5470) 1.46% (0.9415) 6.33%*** (2.7444) (-15; +15) 2.60%** (2.2965) 1.08% (0.7972) 5.08%** (2.5311) (-10; +10) 2.56%*** (2.7441) 1.48% (1.3311) 4.31%** (2.6105) (-5; +5) 1.82%*** (2.6929) 0.98% (1.2227) 3.17%** (2.6531) (-3; +3) 1.20%** (2.2282) 0.95% (1.4860) 1.60%* (1.6768) (-2; +2) 0.82%* (1.8020) 0.85% (1.5706) 0.77% (0.9529) (-1; +1) 0.28% (0.7877) 0.35% (0.8234) 0.17% (0.2668)
Intervals before and after the event
The mean CARs around the event dates are positive in all three Panels. The mean CARs of the entire period indicate that target firms outperform the CDAX benchmark. This especially holds for longer event-windows around the event date. Moreover, the CARs of short event windows are smaller and less significant.
During the longest (-80; +80) event day window, firms targeted by activist hedge funds earned a mean CAR of 5.63% in Panel A. However, the mean CAR is at 12.54% significantly higher during up-markets. In the shorter 21-day event window (-10; +10) targeted firms’ of Panel A significantly exceeds the benchmark returns by 2.56% at the 1% level. The same event window indicates that hedge fund activism generates higher short-term excess returns in up-markets than in down-up-markets with average CARs of 4.31% and 1.48%, respectively. Whereas all mean CARs are positive around the event window, some mean CARs before and after the event are negative in the entire period and in the down-market period. As indicated by different significant average CARs for several event windows prior to the event date (i.e., 80; -3); (-45; -3); (-30; -3)), there is an observable price run-up before the event date for the entire period as well as the up-market period. Especially during up-markets (Panel C) most of the price run-up starts already 30 days prior to the initial stock disclosure. The corresponding average CAR is 6.77% during the (-30; -3) event day window before the event. As the significant intervals before the event date suggest, a substantial increase of mean CARs for the entire periods and up-market periods is generated by the price run-up before the event date.
Figure 2: Average cumulative abnormal returns (0; +80)
-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 0 10 20 30 40 50 60 70 80 Cu m ul at iv e ab no rm al re tu rn ( CA R)
To further examine the short-term valuation, Figure 2 shows the CARs after the event days (0; +80). On average, all three panels are characterised by a jump in the CARs immediately after the stock disclosure. This suggests that the information of hedge fund activism is reflected in the stock prices some days after the disclosure.
However, as hypothesized, there is a marginally significant decrease of average CARs into negative returns in the down-market period; that is in the event window (+3; +80) the average CAR amounts to -3.54%. Figure 3 combines the abnormal trading volume of all 168 activist interventions with the CARs of all Panels during the (-80; +80) event day window. Figure 3: Abnormal trading volume and Cumulative abnormal returns (-80; +80)
The overall pattern of abnormal trading volume is comparable with Bessler et al. (2015). Interestingly, the abnormal volume does not reach its peak on the event date (i.e., time zero), but on the day before the initial disclosure date. This might be attributable to market rumours that unfold between notification and publishing date. Moreover, there is an observable increase of abnormal volume during the run-up period. Brav et al. (2008) explain the trading volume around the event date with coordinated ‘wolf pack’ investments and tipping of hedge funds. Another explanation might be that abnormal returns and volumes around the event date are caused by short-term buying pressure or a general market overreaction to the stake disclosure. However, as Figure 3 shows this might be only the case during the full sample period (Panel A) and in up-markets (Panel C).
Overall, the positive CARs indicate that activist hedge funds generate on average significant short-term shareholder value and that returns of hedge fund activism are lower during down-market periods.
-2% 0% 2% 4% 6% 8% 10% 12% 14% 0 0,5 1 1,5 2 2,5 3 3,5 4 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 Cu m ul at iv e ab no ra l r et ur n Ab no rm al tr ad in g vo lu m e
B. Long-term effects of hedge fund activism
The first analysis indicates that hedge fund activism in Germany generates short-term shareholder value, especially during up-market periods. To evaluate the long-term effect of hedge fund activism, I present the buy-and-hold abnormal returns in part B.1., followed by the calendar-time portfolios in part B.2 and the cross-sectional regressions in part B.3.
B.1. Buy-and-hold abnormal returns
To investigate whether activist hedge funds facilitate long-term value creation, I calculated buy-and-hold abnormal returns (BHARs). Table 3 reports average BHARs for all three samples and various event windows. Figure 4 displays the average BHARs exceeding the CDAX market index for the longest window (-40; +240). The average buy-and-hold returns for the longest window during the entire period, downmarket and upmarket periods are 2.88%, -8.14% and 20.78%, respectively. Only the up-market BHAR is significantly different from zero. Whereas, Mietzner & Schweizer (2014) observe significant long-term underperformance over 250 holding days for their entire sample between 1993 and 2007.
Table 3:
Buy-and-hold abnormal returns
This table shows the mean buy-and-hold abnormal returns (BHARs) for all three Panels A, B and C. The full sample A between January 1, 2007 and December 31, 2014 is divided into 2 subsamples B and C. Panel B covers the down-market period from Q1 2007 - Q4 2008 , whereas Panel C covers the up-market period from Q1 2009 – Q4 2014. The intervals are the number of days around the event date of the initial hedge fund block disclosure. All returns are calculated in excess of the German CDAX index. Statistical significance of the mean BHAR is based on a skewness-adjusted t-test, as recommended by Barber and Lyon (1997). Significance at the 10%, 5%, and 1% levels is indicated by *, ** and ***, respectively.
Panel A (N=168) Panel B (N=104) Panel C (N=64)
Mean BHAR t-test Mean BHAR t-test Mean BHAR t-test
Intervals (-40; +60) 5.20%* 1.73 -2.04% -0.63 16.96%*** 2.93 (-40; +120) 4.02% 0.96 -6.50%* -1.68 21.13%** 2.50 (-40; +240) 2.88% 0.54 -8.14% -1.63 20.78%* 1.74 (0; +60) -0.83% -0.58 -3.15%* -1.71 2.94% 1.43 (0; +120) -3.46% -1.52 -8.11%*** -2.93 4.08% 1.17 (0; +240) -5.55% -1.63 -9.44%** -2.08 0.78% 0.18
period, downward trend in BHARs starts to materialize about 100 days after the event. Finally, BHARs slightly decrease 120 days after the event date in the up-market period but remain at a relatively constant level fluctuating around 17%.
Figure 4: Average buy-and-hold abnormal returns(BHARs) between (-40; +240) days
Figure 5: Average buy-and-hold abnormal returns (BHARs) (0; +240) days
To further investigate the effect of long-term valuation effects, Figure 5 plots the average BHARs in the event window (0; +240) without the run-up period prior to the event. In comparison to Figure 4, the magnitude of activist hedge funds is lower after the run-up period. The average BHARs for the (0; +240) window, without the run-up period prior to the event
-15% -10% -5% 0% 5% 10% 15% 20% 25% -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 Bu y-an d-hol d abnor m al re tur n (B H A R )
Panel A Panel B Panel C
-15% -10% -5% 0% 5% 10% 15% 20% 25% 0 20 40 60 80 100 120 140 160 180 200 220 240 Bu y-an d-hol d abnor m al re tur n (B H A R )
date, for Panel A, Panel B (down-market) and Panel C (up-market) are -5.55%, -9.44% and 0.78%, respectively. In this case, only the down-market BHAR is significantly different from zero at the 5% level.
Overall, the analysis of the BHARs suggests that activist hedge funds create most of the shareholder value before the event date and during up-market periods. Furthermore, only the down-market period indicates that activist hedge funds reduce long-term shareholder value. This implicates that the value creation of hedge funds activism in Germany depends strongly on the general market environment.
B.2. Calendar-time portfolios
To further assess whether activist hedge funds persistently create long-term shareholder value in target firms, I built the time portfolios. Figure 6 shows the average calendar-time portfolio returns of the full sample (i.e., Panel A) in comparison to the CDAX benchmark returns in holding periods of 12 and 18 months. It includes all portfolios between November 2006 and March 2016. As the figure depicts, the calendar-time portfolio with the price run-up (-2; +10) outperforms the other two portfolios and the benchmark at the end of the timespan, whereas the exclusion of the two months before the event (0; +10) returns calendar-time portfolios that underperform the CDAX. This finding is consistent with the major value creation prior to the event from the long-term BHAR analysis.
Figure 6: Calendar-time portfolios of the full sample (N=168)
To test if the abnormal returns of the calendar-time portfolio are zero and if the portfolio returns are abnormal in risk factors, Table 4 shows the regression results on the Fama-French
3-factor model over 12 and 18 months. Alpha is the average monthly abnormal return on the portfolio of firms targeted by activist hedge funds in the different time periods. The one year (-2; +10) calendar-time portfolio consisting of all events (Panel A) earns an average monthly abnormal return of -0.04% and in up-markets (Panel C) -0.01%. The intercept of Panel A is statistically significant. Interestingly, only the (-2; +10) alpha during the down-market period (Panel B) is positive at 0.05%, but not significant.
Table 4:
Fama-French three factor Calendar-time portfolio regression
This table shows the abnormal returns from calendar time portfolio regressions (equal-weighted) between November 2006 and March 2016 for monthly calendar-time portfolio returns on factors of the Fama-French approach (HML and SMB). The German CDAX index is used as the market portfolio. The numbers in the parenthesis indicate the t-values. Significance at the 10%, 5%, and 1% levels is indicated by *, ** and ***, respectively.
Window Alpha Beta HML SMB R-squared
Panel A: entire period (N=168)
(-2; +10) -0.0004* (-1.7078) 0.8959*** (48.4734) 0.0004 (1.0287) 0.0033*** (10.6914) 0.5723 (0; +12) -0.0007*** (-2.8660) 0.8944*** (51.9160) 0.0003 (0.7981) 0.0032*** (11.2099) 0.6092 (-2; +16) -0.0006*** (-2.8472) 0.8912*** (54.6176) 0.0001 (0.1815) 0.0033*** (12.2761) 0.6172 Panel B: down-market period (N=104)
(-2; +10) 0.0005 (0.6863) 1.0017*** (30.2995) -0.0002 (-0.2901) 0.0032*** (5.6603) 0.6172 (0; +12) -0.0008 (-1.4614) 0.9613*** (33.1708) 0.0002 (0.2262) 0.0027*** (5.5333) 0.6631 (-2; +16) -0.0010** (-2.1467) 0.9510*** (37.9389) 0.0002 (0.3927) 0.0028*** (6.5236) 0.688 Panel C: up-market period (N=64)
(-2; +10) -0.0001 (-0.5159) 0.7491*** (22.6891) 0.0015*** (2.9555) 0.0020*** (4.2045) 0.3648 (0; +12) -0.0003 (-1.2531) 0.7403*** (23.3740) 0.0014*** (2.9977) 0.0016*** (3.4830) 0.3985 (-2; +16) -0.0003 (-1.1499) 0.7440*** (25.7762) 0.0009** (2.0816) 0.0019*** (4.5306) 0.4056
B.3. Cross-sectional regression
The positive CARs in section B.1. indicate that activist hedge funds generate significant positive shareholder value in the short-term. To determine the cross-sectional differences around hedge fund activism in abnormal returns, I regress CARs during the short-term event window (-3; +3) and the long-term event window (-3; +80) on various variables. These variables include information about the influence of the largest shareholder, valuation measures, target firm characteristics and whether the activist hedge funds have exerted public activism. Table 6 shows the results of the cross-sectional regression during the (-3; +3) window. The results are robust to year and industry fixed effects and show that the short-term market reactions are only positive if the largest shareholder is attributable to the government (Model I). In line with Bessler et al. (2015), short-term announcement returns are lower if the largest shareholder is a bank or an individual/family investor. In the first model the regression results are not statistically significant. In the full model (Model V), the coefficients of the largest shareholder are higher if the dominant shareholder is a bank or a government.
Second, the valuation measures market-to-book and LnSize in Model II are not statistically significant, but indicate that the size of the target firm might have a positive effect on short-term abnormal returns, larger firms may benefit more from activism. In Model III, the dummy variable public activism is equal to one if the hedge fund exerts public activism, like a board representation campaign, and zero otherwise. Public activism exerted by activist hedge funds contributes significantly to a positive value creation in the short-run. This effect is even higher in the full Model V.
Table 5:
Cross-sectional regressions – the effects on short-term CARs in the (-3; +3) event window
This table shows the cross-sectional regression results of the short-term cumulative abnormal returns (CARs) of the entire period (Panel A) in the (-3; +3) time window as the dependent variable. All CARs are calculated in excess of the German CDAX index. The variables of the largest shareholder and activism are dummy variables. See Table 1 for the descriptive statistics of the variables and Table A.2 for a definition of all variables. Industry fixed effects are based on the 2-digit SIC code. The t-statistics are based on robust standard errors. Significance at the 10%, 5%, and 1% levels is indicated by *, ** and ***, respectively.
Model I II III IV V Constant 0.0032 (0.1279) -0.0319 (-0.8435) -0.0057 (-0.3848) -0.0210 (-1.0153) -0.0417 (-0.8849) Largest Shareholder Bank -0.0029 (-0.1115) 0.0058 (0.1809) Corporation -0.0190 (-0.7499) -0.0219 (-0.6856) Government 0.0248 (0.8043) 0.0241 (0.7007) Individual/ family -0.0056 (-0.2162) -0.0080 (-0.2446) Valuation LnSize 0.0036 (0.9583) 0.0030 (0.6513) Market to book 0.0017 (0.6286) -0.0035 (-0.8292) Activism Public activism 0.0311* (1.7822) 0.0349* (1.8920) Firm characteristics Capex/ Sales 0.1147 (0.5906) 0.0116 (0.0589) Cash-Flow -0.1007 (-0.5768) -0.0967 (-0.5807) Cash holdings -0.0730* (-1.7915) -0.0859** (-2.0861) Leverage -0.0630 (-1.4756) -0.0828* (-1.7236) Payout 0.0016 (1.4509) 0.0016 (1.5316) R&D -0.1115 (-0.8453) -0.1187 (-0.7992) ROA 0.1010 (0.7432) 0.1012 (0.7531) ROE 0.0695** (2.2775) 0.0621* (1.8787) TobinQ 0.0158* (1.6878) 0.0253** (2.0549)
Year fixed effects Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes
R-squared 0.0174 0.013 0.0275 0.0924 0.1511
Table 6:
Cross-sectional regressions – the effects on long-term CARs in the (-3; +80) event window
This table shows the cross-sectional regression results of the short-term cumulative abnormal returns (CARs) of the entire period (Panel A) in the (-3; +80) time window as the dependent variable. All CARs are calculated in excess of the German CDAX index. The variables of the largest shareholder and activism are dummy variables. See Table 1 for the descriptive statistics of the variables and Table A.2 for a definition of all variables. Industry fixed effects are based on the 2-digit SIC code. The t-statistics are based on robust standard errors. Significance at the 10%, 5%, and 1% levels is indicated by *, ** and ***, respectively.
Model I II III IV V Constant 0.0577 (0.7823) -0.0200 (-0.1497) -0.0204 (-0.3065) 0.0168 (0.1796) -0.0448 (-0.2184) Largest Shareholder Bank -0.0297 (-0.3984) -0.0094 (-0.0903) Corporation -0.1293* (-1.9617) -0.1188 (-1.4116) Government -0.1579 (-1.1244) -0.123 (-0.9518) Individual/ family -0.1509* (-1.8702) -0.1116 (-1.1311) Valuation LnSize 0.0056 (0.3669) 0.0178 (0.7035) Market to book -0.0144 (-1.1342) -0.0418* (-1.6676) Activism Public activism 0.0620 (0.6919) 0.1124 (1.1479) Firm characteristics Capex/ Sales 0.5746 (0.5591) 0.0177 (0.0178) Cash-Flow -0.9475 (-0.9998) -0.9539 (-1.0635) Cash holdings -0.2138 (-1.1368) -0.2867 (-1.3958) Leverage -0.2772* (-1.7249) -0.4513** (-2.1469) Payout 0.0073 (1.0282) 0.0077 (0.9752) R&D 1.4161** (2.1527) 1.1161 (1.4352) ROA 1.3855* (1.7540) 1.3261* (1.6693) ROE 0.0157 (0.0815) -0.0216 (-0.1085) TobinQ 0.0201 (1.5784) 0.0317 (0.4004)
Year fixed effects Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes
R-squared 0.0403 0.022 0.0181 0.1276 0.1779
The regression results for the long-term cumulative abnormal returns (CARs) during the (-3; +80) window are in Table 6. Interestingly, most of the coefficients show a comparable magnitude in the longer period. Yet, there are some observable differences between the short and term period. For instance, all dominant shareholders have a negative impact on long-term announcement effects. The coefficients of corporations and individual or family investors are statistically significant at the 10 % level (Model I). The market-to-book ratio in the full Model V, suggests that the abnormal returns are significant lower if the target firm is undervalued. This might be attributable to the financial crisis.
In comparison to the short-term window, announcement returns of targets with public activism are higher in the long-run. This indicates a long-term value creation of hedge fund activism in cases of public campaigns. Furthermore, in the long-run there is no significant evidence that positive returns are based on prior performance in terms of ROE and Tobin’s Q. High leverage has still a negative effect on the announcement returns, and the influence is more pronounced in the longer-term. Long-run returns are also higher for target firms that invest in research and development.
5. Summary
This thesis examined the effects of hedge fund activism in Germany using a sample of 168 activist hedge fund interventions from 2007 to 2014. I followed standardized event study methodology to study the effects around the event date of the initial stock disclosures. The analyses of activist hedge funds in Germany reveal several short and long-term differences to prior research on activism in the U.S. Furthermore, this thesis indicates differences in the effects of activism on performance between the down and up-market environment.
Furthermore, the analyses reveal that there is a significant price and trading run-up before the disclosure date. This holds for the entire sample period and indicates that the market faces rumours and/ or tipping of hedge funds. In up-market periods, the price run-up is especially pronounced which may be an indication for investors’ over-optimism under favourable market conditions. This yields further support for the interpretation that hedge fund activism can convey important informational signals to the market.
Whereas most of the literature provides evidence for short-and long-term value creation (e.g., Bebchuk et al., 2015), the results of this study indicate mixed evidence for long-term shareholder value creation. The analyses of the BHARs indicate that activist hedge-funds create long-term shareholder value in the up-market period, yet hedge fund activism significantly negatively affects the long-term value creation during the down-market period. The negative valuation effects after being targeted are in line with recent research by Cremers et al. (2016). Overall, these results indicate that strategies pursued by hedge funds in Germany only work under up-market conditions, but not under down-market conditions.
In addition to that, firms targeted by activist hedge funds share some common characteristics. On average, target firms tend to be undervalued and smaller in size, have sufficient cash-flows, and are cash-rich, indicating that activist hedge funds aim at share repurchases or increasing dividend payments. This confirms findings from previous studies which state that activist hedge funds target firms to pursue changes related to reduce the agency costs of free cash flows (Boyson and Mooradian, 2011).
public activism. In one relatively recent study on the Hermes UK Focus Fund, Becht et al. (2008) examine the underlying motives of activism by using exclusive and detailed data provided by one British hedge fund. These data enabled the researchers to gain detailed insights into private interventions that would not have been observable when using public information only. Hence, I further suggest that one way to gain more fine-grained insights into private forms of hedge fund activism and activism’s underlying motives is by following Becht et al.’s (2008) approach. Such in-depth analyses may ultimately also be a useful avenue to gain more insights about the circumstances under which hedge fund activism leads to long-term value creation for the firm that goes beyond mere short-term effects.
This ties in with the last limitation of this study. The analyses reveal that activism has different long-term effects on performance depending on the market condition. However, the data do not allow to separate the effects of activism from mere environmental influences. Hence, the development in long-term value creation cannot be entirely causally attributed to hedge fund activism. Especially the rather modest price-run up in down-market periods as opposed to a pronounced price run-up in up-market periods suggests that the overall market conditions determine the extent to which activist hedge fund strategies contribute to firm value creation. Consequently, future studies should also devote more attention to addressing the effect of the overall economic situation on the effectiveness of activist strategies for performance.
Despite some limitations, this thesis expands the current literature by being one of the first studies to include the years of and after the financial crisis into analyses and to compare effects of hedge fund activism on performance during up-market and down-market periods. Furthermore, this research contributes to the emerging stream of research investigating hedge fund activism outside the US (e.g., Bessler et al., (2015)). Since hedge fund activism outside the US is on the rise, it is critical to investigate the effects that such activism has on short as well as long-term performance.
References
Achleitner, A.-K., Betzer, A., Gider, J., 2010. Do Corporate Governance Motives Drive Hedge Fund and Private Equity Fund Activities? European Financial Management 16, 805–828.
Andres, C., 2008. Large shareholders and firm performance—An empirical examination of founding-family ownership. Journal of Corporate Finance 14, 431–445.
Appel, I., Gormley, T.A., Keim, D.B., 2016. Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism. Working paper. Carroll School of Management, Boston College.
Aslan, H., Kumar, P., 2016. The product market effects of hedge fund activism. Journal of Financial Economics 119, 226–248.
Barber, B.M., Lyon, J.D., 1997. Detecting long-run abnormal stock returns: The empirical power and specification of test statistics. Journal of Financial Economics 43, 341–372. Bebchuk, L.A., Brav, A., Jiang, W., 2015. The Long-Term Effects of Hedge Fund Activism,
Columbia Law Review 115, 1085-1156.
Becht, M., Franks, J., Grant, J., 2015a. Hedge fund activism in Europe: does privacy matter?, in: Research Handbook on Shareholder Power. Edward Elgar Publishing, pp. 116–128. Becht, M., Franks, J., Mayer, C., Rossi, S., 2010a. Returns to Shareholder Activism: Evidence
from a Clinical Study of the Hermes UK Focus Fund. Review of Financial Studies 23, 3093–3129.
Becht, M., Franks, J.R., Grant, J., 2010b. Hedge Fund Activism in Europe. Working paper. Université Libre de Bruxelles, Brussels.
Becht, M., Franks, J.R., Grant, J., Wagner, H.F., 2015b. The Returns to Hedge Fund Activism: An International Study. Working paper. Solvay Brussels School, Brussels. Bessière, V., Kaestner, M., Lafont, A.-L., 2011. Hedge fund activism: insights from a French
clinical study. Applied Financial Economics 21, 1225–1234.
Bessler, W., Drobetz, W., Holler, J., 2015. The Returns to Hedge Fund Activism in Germany. European Financial Management 21, 106–147.
Boyson, N.M., Gantchev, N., Shivdasani, A., 2016. Activism Mergers. Working paper. Northeastern University.
Boyson, N.M., Mooradian, R.M., 2011. Corporate governance and hedge fund activism. Review of Derivatives Research 14, 169–204.
Brav, A., Jiang, W., Kim, H., 2015. The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes. Review of Financial Studies 28, 2723–2769. Brav, A., Jiang, W., Kim, H., 2009. Hedge Fund Activism: A Review. Foundations and
Trends in Finance 4, 185–246.
Brav, A., Jiang, W., Ma, S., Tian, X., 2016. How does hedge fund activism reshape corporate innovation. Working paper. Duke University.
Brav, A., Jiang, W., Partnoy, F., Thomas, R., 2008. Hedge Fund Activism, Corporate Governance, and Firm Performance. The Journal of Finance 63, 1729–1775.
Brückner, R., Lehmann, P., Schmidt, M.H., Stehle, R., 2015. Another German Fama/French Factor Data Set. Working paper. Humboldt University, Berlin.
Chen, J., Jung, M.J., 2016. Activist hedge funds and firm disclosure. Review of Financial Economics 29, 52–63.
Clifford, C.P., 2008. Value creation or destruction? Hedge funds as shareholder activists. Journal of Corporate Finance 14, 323–336.
Coffee, Jr., J.C., Palia, D., 2016. The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance. Annals of Corporate Governance 1, 1–94.
Cremers, K.J.M., Giambona, E., Sepe, S.M., Wang, Y., 2016. Hedge Fund Activism and Long-Term Firm Value. Working paper. University of Notre Dame.
Fama, E.F., French, K.R., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3–56.
Gantchev, N., 2013. The costs of shareholder activism: Evidence from a sequential decision model. Journal of Financial Economics 107, 610–631.
Gillan, S.L., Starks, L.T., 2007. The Evolution of Shareholder Activism in the United States. Journal of Applied Corporate Finance 19, 55–73.
Gillan, S.L., Starks, L.T., 1998. A Survey of Shareholder Activism: Motivation and Empirical Evidence. Contemporary Finance Digest 2, 10-34.
Goergen, M., Manjon, M.C., Renneboog, L., 2008. Is the German system of corporate governance converging towards the Anglo-American model? Journal of Management & Governance 12, 37–71.
Greenwood, R., Schor, M., 2009. Investor activism and takeovers. Journal of Financial Economics 92, 362–375.
Grossman, S.J., Hart, O.D., 1980. Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation. The Bell Journal of Economics 11, 42.
The American Economic Review 76.
Jensen, M.C., Meckling, W.H., 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3, 305–360.
Klein, A., Zur, E., 2011. The impact of hedge fund activism on the target firm’s existing bondholders. Review of Financial Studies 24, 1735–1771.
Klein, A., ZUR, E., 2009. Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors. The Journal of Finance 64, 187–229.
Krishnan, C.N.V., Partnoy, F., Thomas, R.S., 2016. The second wave of hedge fund activism: The importance of reputation, clout, and expertise. Journal of Corporate Finance 40, 296–314.
La Porta, R., Lopez-De-Silanes, F., Shleifer, A., 1999. Corporate Ownership Around the World. The Journal of Finance 54, 471–517.
Mietzner, M., Schweizer, D., 2014. Hedge funds versus private equity funds as shareholder activists in Germany — differences in value creation. Journal of Economics and Finance 38, 181–208.
Partnoy, F.S., Thomas, R.S., 2006. Gap Filling , Hedge Funds , and Financial Innovation. Working paper. University of San Diego.
Shleifer, A., Vishny, R.W., 1986. Large Shareholders and Corporate Control. Journal of Political Economy 94, 461.
van der Marel, G., 2015. ‘You ’re rewarded if you cut jobs, but ultimately the company goes under’ - Interview Martin Lipton. Het Financieele Dagblad 11.
Weber, A., 2009. An empirical analysis of the 2000 corporate tax reform in Germany: Effects on ownership and control in listed companies. International Review of Law and
Economics 29, 57–66.
Weber, P., Zimmermann, H., 2013. Hedge fund activism and information disclosure: The case of germany. European Financial Management 19, 1017–1050.
Zhu, H., 2013. The Preventive Effect of Hedge Fund Activism. Working paper. Duke University, Durham.
Appendix
Figure A.1
The boom of activist hedge funds
Figure A.2
Figure A.3
Average cumulative abnormal returns (-80; +120)
Figure A.4
Calendar-time portfolios of hedge fund activism during down-markets
-4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120
Panel A Panel B Panel C
0 20 40 60 80 100 120 140 N ov -06 Fe b-07 Ma y-07 A ug -07 N ov -07 Fe b-08 Ma y-08 A ug -08 N ov -08 Fe b-09 Ma y-09 A ug -09 N ov -09 Fe b-10
Figure A.5
Calendar-time portfolios of hedge fund activism during up-markets
0 100 200 300 400 500 600 N ov -08 Ma r-09 Jul -09 N ov -09 Ma r-10 Jul -10 N ov -10 Ma r-11 Jul -11 N ov -11 Ma r-12 Jul -12 N ov -12 Ma r-13 Jul -13 N ov -13 Ma r-14 Jul -14 N ov -14 Ma r-15 Jul -15 N ov -15
Table A.2
Industry distribution
This table shows the industry distribution based on the two-digit standard industrial classification (SIC) codes of the target firms subject to hedge fund activism in Germany. Panel A covers the full sample between 2007-2014. It is divided into 2 subsamples B and C. Panel B covers the down-market period from Q1 2007 - Q4 2008, whereas Panel C covers the up-market period from Q1 2009 – Q4 2014. The control group contains all constituents of the German DAX, MDAX, SDAX, TecDAX indices.
Industry Number of observations
Panel A Panel B Panel C Control
N % N % N % N % Construction 3 1.79% 1 0.96% 2 3.13% 2 1.07% Manufacturing 72 42.86% 38 36.54% 34 53.13% 95 50.80% Transportation and Public Utilities 18 10.71% 15 14.42% 3 4.69% 16 8.56% Wholesale Trade 5 2.98% 3 2.88% 2 3.13% 6 3.21% Retail Trade 12 7.14% 8 7.69% 4 6.25% 7 3.74% Finance, Insurance & Real Estate
16 9.52% 15 14.42% 1 1.56% 34 18.18% Services 42 25.00% 24 23.08% 18 28.13% 27 14.44% Others 0 0.00% 0 0.00% 0 0.00% 4 2.14% Total 168 104 64 187 Table A.1 Event distribution
This table shows the event distribution of the full sample (N=164) in terms of the number of involved hedge funds and the number of target firms subject to hedge fund activism between 2007-2014 in Germany.
Number of observations
# of activist HFs 84
with 1 target 50
with 2 targets 13
with 3 or more targets 21
# of firms 107
targeted by 1 activist HF 78
targeted by 2 activist HFs 15
