Academic Roundup

Manifest-I presents a summary of recently released academic papers on international corporate governance and corporate social responsibility issues.

Hedge fund investor activism and takeovers
Robin Greenwood and Michael Schor, Harvard University

Hedge fund activism has limited scope to bring about far-reaching effects on corporate governance, this paper has found. The authors examined long-term stock returns around hedge fund activism, and find hedge funds are better suited to identifying undervalued targets and prompting a takeover than engaging on long-term corporate governance issues.
The paper finds that activism is mainly focused on small firms — companies with little analyst coverage that have underperformed relative to other firms in their industries, making them strong candidates for future takeovers. Furthermore, the size of targets is related to the limited capital hedge funds have: activists, the paper finds, need to acquire at least a 5% stake in order to most effectively push for a takeover.

The authors’ view is that hedge funds invest in small undervalued companies with an ultimate goal of seeing these targets bought out. As returns are highest for targets acquired within 18 months of the activist filing, activists are largely focused on bringing about such a result rather than making significant governance changes.

Where are the shareholders’ mansions? CEOs’ home purchases, stock sales, and subsequent company performance
Crocker Liu, Arizona State University; and David Yermack, New York University

Future company performance deteriorates when chief executives acquire extremely large or costly mansions and estates, this paper has found. The authors examine the relationship between stock performance and the size of a chief executive’s home, and suggest that inferior stock price performance following these purchases is consistent with large mansions and estates being proxies for chief executive entrenchment.

However, the paper finds that where a chief executive does not sell any shares in the year leading up to acquiring a home, his stock will subsequently perform significantly better than the stocks of firms where chief executives do liquidate equity to finance house purchases. The authors suggest that the retention of company shares combined with the purchase of a new home seems to send a signal of commitment from a chief executive to his company.

October 2007