Accounting Webinar (2020-15)

Topic: Living with the Frenemy: Common Ownership and Hedge Fund Activism

Speaker: Zhaoyang Gu, The Chinese University of Hong Kong

Time: Wednesday, Nov 25th, 10:00-11:30 a.m

Place: Microsoft Teams

Abstract:

Mutual funds do not always join hands with hedge funds in activism campaigns. In this study, we explore how the incentive divergence between hedge funds and mutual funds affects hedge funds’ activism (HFA) campaign decisions, objectives, and tactics. Such divergence arises when hedge funds aim at single-target value maximization while mutual funds that simultaneously hold a target and its same-industry peers pursue joint portfolio maximization. We find that hedge fund activists are less likely to target firms with connected peers (through a common mutual fund blockholder), and the effect is more pronounced when a higher fraction of firm shares is held by actively managed mutual funds and when the firm operates in an industry of higher common ownership concentration. We also find that hedge funds pursue more specific objectives but choose less confrontational tactics when targeting firms with connected peers, consistent with hedge funds’ cost-benefit trade-offs. Additionally, targets with connected peers experience higher market reaction on campaign announcement and greater post-activism operational performance improvement. To further establish causality, we use the annual reconstitution of the Russell indices as the instrumental variable of mutual fund common ownership. Collectively, our findings suggest common ownership constitutes a subtle cost deterring activism intervention by hedge funds.

Introduction:

Dr. Zhaoyang Gu is Professor of Accountancy and Outstanding Fellow of Faculty of Business Administration at The Chinese University of Hong Kong (CUHK). Previously he was an Assistant and Associate Professor at Carnegie Mellon University, and an Associate Professor and Honeywell Professor in Accounting at the Carlson School of Management, University of Minnesota, where he was also the Accounting PhD Coordinator. Dr. Gu has published a number of papers in the top accounting journals and has taught financial and management accounting at the undergraduate, MBA, EMBA and PhD levels. Dr. Gu finished his BA in English from Tsinghua University (1988) and MA in International Management from Renmin University of China (1991), before he went to the US to obtain his MA in Economics and PhD in Accounting from Tulane University (1999). He is a CPA (non-practicing) in the US.

//www.bschool.cuhk.edu.hk/staff/gu-zhaoyang/

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