Edited by Phoebus Athanassiou
Alon Brav*, Wei Jiang† and Hyunseob Kim‡ 15 16 17 INTRODUCTION During the past decade, hedge fund activism has emerged as a new type of corporate governance mechanism, capable of bringing about operational, financial, and governance reforms in target firms. Shareholder activism (Gillan and Stark (2007), Karpoff (2001)) and, more broadly, the monitoring of corporate managers by large investors (Shleifer and Vishny (1986), Grossman and Hart (1980)) are not new phenomena in global capital markets. In the United States (US), institutional investors, including pension funds and mutual funds, have actively engaged in the management of target public companies as far back as the 1980s with the intention of creating long-term shareholder wealth. Early institutional shareholder activism was constrained by regulatory and structural barriers, including the ‘free-rider problem’ and inherent conflicts of interest between target firms and institutional investors (Black (1990)). As a result, no conclusive results exist in the academic literature on the effect of activist investing by institutional shareholders. On several levels, hedge fund activism distinguishes itself from the activism of other institutional shareholders who seek to induce changes in public corporations. First, stronger financial incentives exist in the case of hedge funds than in the case of other institutional activists. On average, hedge funds earn significant performance fees, normally around 20 per cent of excess returns in addition to fixed management fees. Moreover, hedge fund managers invest a substantial proportion of their personal wealth in the funds that they manage, alongside their limited partners. This sui generis compensation...
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