Hedge Funds versus Private Equity Funds as Shareholder Activists - Differences in Value Creation

Abstract

This paper analyzes market reactions triggered by announcements that hedge funds and private equity investors have purchased large blocks of voting rights. We argue that changes in shareholder wealth are related to the opportunity, possibility, and motivation of being an active blockholder who successfully reduces agency problems. We find positive abnormal returns following an announcement that an active shareholder has acquired at least 5% of a company's voting rights. Proxy variables for agency costs explain the market reaction only for investments of private equity funds. Considering the long-term stock price performance, we observe negative buy-and-hold abnormal returns especially for the hedge fund samples. We argue that this is because of the German corporate governance system, whereby hedge funds must align their interests with advisory board members. Therefore, we believe the distinct negative post-announcement stock performance of hedge fund targets may be a misinterpretation by the capital market of a hedge fund's abilities and motivations. It seems market participants do not believe hedge fund activism creates wealth effects in a manner comparable to private equity engagements.