Shepherds in Wolves’ Clothing? Hedge Fund Activism Using Corporate Divestitures

Abstract

With the rise of a new wave of hedge fund activism, debate has been raging over whether activist hedge funds need to be regulated, especially since renowned critics have labelled them as “wolves,” whose goals is to extract short-term profits. Using a sample of hand-collected activist-initiated divestitures, this paper examines the ability of hedge fund activists to create long-term value and compares their efficiency to other shareholder activists. The hedge fund activists in our sample create tangible long-term improvements in firm value not by initiating the sale of the target but by improving firm profitability through selloffs involving large asset reductions. Our results are consistent even after addressing endogeneity concerns.