New Investor Activists as Corporate Monitors

2010 May 03

Jours fixes take place on the first monday of the month, starting at 5:00 p.m., in the House of Finance (Campus Westend).

[Taro Niggemann, E-Finance Lab]

The presentation presents the results of a paper, which investigates the role of new investor activists as corporate monitors. I analyze changes in target firm stock return volatility and operating performance as well as the links between these changes. I find a temporary increase in volatility around the announcement of activist intentions, followed by a structural decline during the activists' engagement. Firms targeted by experienced serial hedge fund activists record no announcement effect and the most pronounced decline in post-event volatility levels compared with firms targeted by other new activists. I find no evidence for significant post-event increases in leverage. I find moderate post-event increases in dividend yield, but the increases are not linked to the lower volatility levels in multi-variate analyses. Firms targeted by experienced serial hedge fund activists record the least significant changes in operating performance. The results suggest that the lower volatility levels under activist influence are not explained by a reduction of free cash flow agency conflicts. Instead, they seem to be the result of a monitoring effect, whereby the market responds with less volatile stock returns to the activist's exercising of control over target firm management in the presence of high information costs. The results hold after controlling for activism outcome, market volatility, industry, size, and historical performance.