The Impact of Hedge Funds on Company Share Prices
Hedge funds have been very prominent in the news lately, but are reluctant to reveal their inner workings, holdings, or investment strategies. However, if the top hedge fund managers make more than $1 billion a year and have an estimated $1.2 trillion under management they must be affecting the financial markets somehow.
Researchers at four business schools, including Wharton, conducted a study on hedge funds and their impact on the financial markets. Hedge funds were found to be more effective than any other activist shareholder at making stock prices jump. Stock prices appear to rise sometime during the 40-day period surrounding a hedge fund’s public announcement of a push for change in a specific company. These gains continued for about 12 months after the announcement.
The study looked at 888 cases involving shareholder activism by 131 hedge funds from the start of 2001 through 2005.
Researchers found that the majority of activist hedge funds targeted companies that they “believe are undervalued based on financial statement analysis.” However, the hedge funds did not try and gain control of these companies. They acquired only a small share about 6%, just enough to have a voice in the company. Their push for change ranged from friendly to hostile and included multiple types of pressure.
Researchers concluded that hedge funds do have a positive affect on company share prices, but warn it might not last too much longer. Abnormal returns resulting from hedge fund activism are likely to decline or even disappear. This research can be found in the report “Hedge Fund Activism, Corporate Governance and Firm Performance” available on the Wharton site.
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