In the paper, The Effects of Hedge Fund Interventions on Strategic Firm Behavior, forthcoming in Management Science, we examine the impact of hedge fund interventions on target firms’ voluntary disclosure and earnings management strategies.
Hedge fund activism has emerged as an important governance mechanism that brings about significant changes in the operations and governance of target firms. With large financial resources and strong incentives to generate returns, hedge fund activists pursue a broad range of objectives and, in many cases, deploy confrontational tactics against the target firm management to achieve their objectives. Mounting evidence and anecdotes suggest hedge fund interventions can induce intense conflicts over corporates strategies, and often heated battles for corporate control, between hedge fund activists and the target firm management. Despite growing interest in hedge fund activism, there is limited evidence on how the target’s management responds to hedge fund activism that can potentially jeopardize the power and career prospects of executives. In this paper, we address this issue by investigating whether and how target firm managers use voluntary disclosure and earnings management strategies after hedge fund activists intervene.