Hostile Activism: Hostile Tactics or Hostile Hedge Funds?

Abstract

I examine reputation building by activist hedge funds and document two new findings regarding hostile activism. First, there is evidence of a permanent reputation effect to hostile activism. Activist hedge funds that have engaged in hostile tactics, receive on average a 3% higher CAR [-10,+10] on their subsequent non-hostile campaigns, compared to hedge funds that have never engaged in hostile tactics. This abnormal return is positively related to the level of hostile reputation of the activist hedge fund. Second, I find that activist hedge funds with higher hostile reputation modify their non-hostile activism style to engage “hostile-like” targets and pursue “hostile-like” objectives, but withhold the use of explicitly hostile tactics. These findings imply that 1) hedge funds are able to build a hostile reputation using their past engagement tactics and that 2) market participants perceive and value such reputation as evidenced by the higher announcement return observed in the hedge fund’s targets.