Hedge fund activism and internal control weaknesses

Abstract

PurposeThe aim of the paper is to investigate the associations between hedge fund activism and corporate internal control weaknesses.Design/methodology/approachIn this paper, the authors identify hedge fund activism events using 13D filings and news search. After matching with internal control related information from Audit Analytics, the authors utilize ordinary least square (OLS) and propensity score matching (PSM) to analyze the data.FindingsThe authors find that after hedge fund activism, target firms report additional internal control weaknesses, and these identified internal control weaknesses are remediated in subsequent years, leading to better financial-reporting quality.Originality/valueThe findings indicate that both managers and activists have incentives to develop a stronger internal control environment after targeting.