(with Ehsan Nikbakht and Andrew Spieler)
Journal of Financial Research (forthcoming)
This research examines reputation building by activist hedge funds and provides two new findings regarding hostile activism. First, there is evidence of a permanent reputation effect to hostile activism. Activist hedge funds that previously engaged in hostile tactics receive on average a 3% higher CAR [-10,+10] on their subsequent non-hostile campaigns, compared to hedge funds that have not previously engaged in hostile tactics. This abnormal return is positively related to the level of the hostile reputation of the activist hedge fund. Second, results indicate that activist hedge funds with higher hostile reputations modify their non-hostile activism style to engage “hostile-like” targets and pursue “hostile-like” objectives but withhold the use of explicitly hostile tactics. These findings imply that (1) hedge funds can build a hostile reputation using their past engagement tactics and (2) market participants perceive and value such reputation as evidenced by the higher announcement return observed in subsequent targets.