Stock Picking in Disguise? New Evidence that Hedge Fund Activism Adds Value

Using a large hand-collected data set spanning from 2000 through 2008, I find substantial evidence that activist hedge funds do more than pick stocks; they improve them. Controlling for differences in target firms, activist investments outperform the same hedge funds' passive investments. Over two months, they earn 3.8% greater returns and over two years, they earn 18.4% greater returns. Measured by financial statements, they improve margins and return on assets ("ROA"), increase payout and leverage, reduce balance sheet assets, and sell their targets more frequently and for higher prices. These results imply that skilled hedge funds can add significant value as corporate partners.