Understanding the Effect of Hedge Fund Activism on the Target Firm – A Qualitative Study on Shareholder Value

Abstract

This thesis represents a qualitative study analyzing a comprehensive interview dataset of long-standing target executives, investment bankers, and activist specialists to improve our understanding of the effects of hedge fund activism on target firms. Hedge funds possess a broad set of tools to alter the firm’s trajectory for long-term value creation or short-term gains that may compromise long-term growth. As such, engagement is shaped by several factors, including the fund’s incentives, fund size, credibility, and geography. Understanding these drivers is vital in comprehending the dynamics of hedge fund activism to increase shareholder value. However, understanding engagement does not directly translate into understanding the consequences for the target firm. Therefore, this thesis provides a theoretical model grounded in shareholder theory that conceptualizes the impact of measures based on their effectiveness to unlock value in the short - or long-term horizon. This research reveals that different measures have distinct temporal implications for value creation, showing that hedge fund activists often advocate for measures aimed at unlocking immediate shareholder value, while the long-term consequences depend upon the alignment with the target firm’s overarching strategy.

Keywords: hedge fund activism; shareholder theory