Does familiarity breed activism? Geography and hedge fund activism

Abstract

I study the role of geographical proximity in hedge fund activism and find that activist hedge funds are more likely to target firms located closer to their headquarters. Despite this proximity preference, activism returns are lower for nearer targets. Alternative factors, including lower activism costs, target selection effects, and reduced employee wealth transfers at nearby firms do not explain lower returns to proximate targets. Instead, results are consistent with familiarity bias in hedge fund targeting decisions. Additional tests focusing on small targets, openly confrontational campaigns, and passive investments reinforce this behavioral explanation.