Does hedge fund activism improve investment efficiency?

Saikat Sovan Deb (), Huu Nhan Duong (), Amanjot Singh () and Harminder Singh ()
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Saikat Sovan Deb: Deakin University
Huu Nhan Duong: Monash University
Amanjot Singh: King’s University College at Western University
Harminder Singh: Deakin University

Review of Accounting Studies, 2024, vol. 29, issue 3, No 14, 2577 pages

Abstract: Abstract We examine the impact of hedge fund activism (HFA) on the investment efficiency of target firms. We find that target firms’ investment efficiency improves after the active involvement of hedge funds. This improvement is mainly evident for HFA campaigns with investment strategy-related reforms as one of the main stated objectives. Among investment strategy-related HFA campaigns, the changes in investment efficiency are more pronounced when hedge funds obtain board representation or privately settle with target firms. HFA improves the investment efficiency of target firms by mitigating overinvestment rather than underinvestment problems. Additional tests reveal that target firms with no resistance to HFA and higher free cash flow accommodate this improvement in investment efficiency following HFA. Overall, our findings highlight the role of HFA as a governance mechanism in improving investment efficiency and influencing managers to reduce overinvestment.

Keywords: Investment efficiency; Hedge fund activism; Overinvestment; Underinvestment; G30; G31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-023-09776-7

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