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Disappearing Discounts: Hedge Fund Activism in Conglomerates

Sehoon Kim

MPRA Paper from University Library of Munich, Germany

Abstract: Hedge fund activism removes the diversification discount in targeted conglomerate firms. Targeted conglomerates increase investment in segments with better growth opportunities, while reducing each division's over-reliance on their own cash flow relative to their reliance on cash flows from other segments. These improvements are stronger when firms are ex-ante financially constrained, when CEOs are subsequently replaced by outsiders, and when payout is subsequently increased. Refocusing is no more valuable than increasing internal efficiency. The results are not driven by mean reversion. The results are consistent with hedge funds' skill in unlocking the value of internal capital markets in diversified firms.

Keywords: Conglomerates; Corporate Governance; Diversification; Hedge Fund Activism; Internal Capital Markets; Resource Allocation (search for similar items in EconPapers)
JEL-codes: G23 G31 G32 G34 (search for similar items in EconPapers)
Date: 2020-03-09
New Economics Papers: this item is included in nep-cfn
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