The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Industry Concentration

This paper studies the long-term effect of hedge fund activism on the productivity of target firms using plant-level information from the U.S. Census Bureau. A typical target firm improves its production efficiency within three years after the intervention, and this improvement is more pronounced in
industries with low concentration. By following plants that were sold post-intervention we also find that efficient capital redeployment is an important channel via which activists create value. We further find that employees of target firms experience a reduction in work hours and stagnation in wages despite an increase in labor productivity. Additional tests refute alternative explanations that attribute the improvement to management’s voluntary reforms, industry consolidation shocks, or hedge funds’ stock picking abilities. The overall evidence is consistent with a real long-term effect of hedge fund intervention on target firms’ fundamentals.

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