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Brav, Alon; Jiang, Wei; Kim, Hyunseob --- "Hedge Fund Activism" [2012] ELECD 242; in Athanassiou, Phoebus (ed), "Research Handbook on Hedge Funds, Private Equity and Alternative Investments" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Hedge Funds, Private Equity and Alternative Investments

Editor(s): Athanassiou, Phoebus

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802789

Section: Chapter 7

Section Title: Hedge Fund Activism

Author(s): Brav, Alon; Jiang, Wei; Kim, Hyunseob

Number of pages: 23

Extract:

7. Hedge fund activism
Alon Brav*, Wei Jiang and Hyunseob Kim
15 16 17




INTRODUCTION
During the past decade, hedge fund activism has emerged as a new type of
corporate governance mechanism, capable of bringing about operational,
financial, and governance reforms in target firms. Shareholder activism
(Gillan and Stark (2007), Karpoff (2001)) and, more broadly, the monitor-
ing of corporate managers by large investors (Shleifer and Vishny (1986),
Grossman and Hart (1980)) are not new phenomena in global capital
markets. In the United States (US), institutional investors, including
pension funds and mutual funds, have actively engaged in the manage-
ment of target public companies as far back as the 1980s with the intention
of creating long-term shareholder wealth. Early institutional shareholder
activism was constrained by regulatory and structural barriers, including
the `free-rider problem' and inherent conflicts of interest between target
firms and institutional investors (Black (1990)). As a result, no conclusive
results exist in the academic literature on the effect of activist investing by
institutional shareholders.
On several levels, hedge fund activism distinguishes itself from the
activism of other institutional shareholders who seek to induce changes in
public corporations. First, stronger financial incentives exist in the case of
hedge funds than in the case of other institutional activists. On average,
hedge funds earn significant performance fees, normally around 20 per
cent of excess returns in addition to fixed management fees. Moreover,
hedge fund managers invest a substantial proportion of their personal
wealth in the funds that they manage, ...