Activism Pressure and the Market for Corporate Assets
The intense and sustained presence of hedge fund activists in many industries and markets makes it likely that activism produces effects beyond those on activism target firms but academic papers have almost exclusively focused on the effects on firms targeted in activist campaigns. The real effects of activism on other firms, stakeholders, institutions, and markets remain largely unexplored.
We investigate the impact of hedge fund activism on corporate transaction markets. Our paper is the first to consider the impact of activism threats (rather than actual campaigns) on corporate acquisitions and sales. It is also the first to explore the effect of activism on the equilibrium outcome in markets for corporate transactions, in particular in markets with heavy exposure to activists.
We establish that there are two channels through which activism pressure influences corporate transaction activity, through target firms and through firms under activism threat. We analyze the impact of activism threats both at the level of individual firms, as well as aggregated at the 3-digit SIC industry level, using the frequency of recent activist campaigns in the industry and also the jumps in activists hedge funds' stakes at the industry level as our measures. Both channels lead to firms becoming more likely to receive merger bids, making more divestitures, and making fewer acquisitions, but with some interesting nuances: for firms that are not targets but under the threat of activism, only large firms make fewer acquisitions.
We estimate that firms in industries in the top quintile of activism pressure (measured by our industry threat variable) sell on average about 23% more assets, and make close to 12% less acquisitions. The overall impact that we attribute to firms under activism threats is substantial relative to that activist targets.
We consider whether this squeeze in real asset liquidity has an effect both on transaction volume and on transaction prices in highly affected industries. We find that outside acquirers - private equity funds, private firms, and listed firms in other industries - provide liquidity and that their acquisition volume increases in affected industries.
We explore whether the squeeze in real asset liquidity also affects transaction prices. We find that seller announcement returns are smaller in corporate sales when industries are affected by activist pressure (merger bids and divestiture bids), and buyer announcement returns are (weakly) larger in this case.
We show that outside asset liquidity provision, in particular from private equity, is significantly stronger in industries with high asset redeployability; conversely, in industry with lower asset redepoyability the price impact is stronger.
We address endogeneity concerns in three ways. First, for target firms we look at the effect when a hedge fund switches from a sizable passive stake in a given firm (Schedule 13G filing) to an activist stance (Schedule 13D filing). Second, for firms under activism threat, we eliminate any effect of unobserved firm-level characteristics beyond those common to all firms in the industry by our use of industry-level measures of hedge fund pressure that are based on the premise that all firms in an industry face the same threat level. Third, we deploy an instrumental variable that is built on the idiosyncratic fund inflow shock of each activist hedge fund, and we hypothetically reassign the new fund inflow according to the previous industry holding structure of each hedge fund, similar to the well-studied instrument of mutual fund fire sales.