A Review of Hedge Fund Activism : Impact on Shareholders and Stakeholders

Hedge fund activism has attracted substantial public attention because of its large financial resources, and ambitious agendas for corporate change through shifts in strategy, productive efficiency, sales of non-performing assets, restructuring of boards and corporate governance mechanisms. The results of the earlier research suggest that hedge fund activism is not just a "stock market sideshow" but appears to induce real effects. Hedge fund activism also has product market and other externalities or effects, however. Theoretically, exogenous productive efficiency improvements and changes in business strategy can impact industry equilibrium and rival companies through a variety of channels; influence vertical relationships with customers and suppliers because of operating and financial interdependence across the value chain; sway debtholders by shifting the balance of power between shareholders and debtholders and exacerbating shareholder-debtholder conflicts; and hurt target employees both along the extensive (number of workers) and intensive margins (number of work hours) through shifts in business strategy. This chapter provides a brief review of recent developments on hedge fund activism, emphasizing its impact on shareholders (both in the short-run and long-run), other stakeholders, and industry rivals of target firms. The chapter closes with a discussion of recent trends in hedge fund activism in global capital markets