Bachelor Thesis The Short-term Effects of Hedge Fund Investment and Activism on Shareholder Value Date: 29-06-2015 Author: Rebecca Rosegg Student number: 10322329 Universiteit van Amsterdam Bachelor Economics and Business, track Finance and Organisation Supervisor: Dr. J.E. Ligterink Statement of Originality This document is written by Student Rebecca Rosegg who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. 2 Abstract Prior research based on events in the United States found that hedge fund investment and activism affect shareholder value in the short run in a positive way. There has not been done much research on the same topic in the Netherlands, even though the results might differ from the findings in the United States. This thesis examines the effect of hedge fund investment and activism in the Netherlands from 2007 to mid-2015 on shareholder returns. This thesis finds significant positive returns surrounding the announcement of both investment and activism by hedge funds. Hedge funds that invest in Dutch companies mainly invest in the financial, industrial and technology industries. Companies in these industries have the largest abnormal returns surrounding the announcement date of all the industries in my sample. This thesis also looks into the objectives of hedge fund activism and the related abnormal returns. When hedge fund activism occurs in the Netherlands, the most common objectives are changes in business strategy and governance. The sample used in this thesis is quite small, consisting of 73 hedge fund filings and 19 activism events. As such, the conclusions drawn in this thesis cannot be used as solid proof. However, I think the results of this research point towards a positive relation between hedge fund investment and activism and the returns of the target company. 3 Table of Contents Abstract Table of Contents 1. Introduction ..................................................................................................................... 5 2. Literature Review............................................................................................................ 8 2.1 Previous research on hedge fund activism in the United States ...................... 9 2.2 Previous research on hedge fund activism in Europe and the Netherlands ... 11 2.3 Conclusion and hypotheses ............................................................................ 12 3. Data .............................................................................................................................. 13 3.1 Data collection method ................................................................................... 13 3.2 Data overview hedge fund filings ................................................................... 14 3.3 Data overview regression ................................................................................ 15 3.4 Data overview hedge fund activism ................................................................ 15 4. Methodology ................................................................................................................. 16 4.1 Event studies ................................................................................................... 16 4.2 Regression ....................................................................................................... 17 5. Results .......................................................................................................................... 17 5.1 Returns around hedge fund filing ................................................................... 17 5.2 Regression on filing returns ............................................................................ 18 5.3 Returns around hedge fund activist events ..................................................... 20 6. Conclusion .................................................................................................................... 21 6.1 Conclusion ...................................................................................................... 21 6.2 Further research .............................................................................................. 22 References ......................................................................................................................... 24 Appendix 1: Descriptive statistics .................................................................................... 25 Appendix 2: Hedge fund filings ........................................................................................ 26 Appendix 3: Hedge fund activist events ........................................................................... 29 4 1. Introduction A hedge fund is an investment vehicle that pools capital from a number of investors and invests in securities and other instruments. Unlike mutual funds, hedge funds can use leverage or derivative instruments, are not required to maintain high levels of diversification, nor are they subject to the same liquidity constraints of mutual funds (Clifford, 2008). Various hedge funds exhibit shareholder activism: The fund assumes large equity positions in a company and uses this ownership to influence the company through, e.g., making demands to the board or appeals to other shareholders. Activist hedge funds can have various objectives, including payout policy and capital structure changes, executive compensation cuts, attempting to play an activist role in a pending merger or acquisition, and business strategy changes like tax efficiency-enhancing proposals and divestment of some divisions (Brav et al., 2008). These actions can influence the shareholder value of a company over different periods. For example, the issuing of special dividends or the liquidation of assets results in a short-term payoff, while capital structure and board and management changes may influence the value over the long-term. Hedge fund activism is a much debated subject. Critics argue that hedge funds only aim at short-term returns by overleveraging and ignoring the adverse effects on long-term shareholders, employees and the future of the company (Lipton, Lewis & Lipton, 2015). However, various empirical papers find positive market reactions to hedge funds’ investment in a target firm, with no evidence of a negative abnormal drift during the 1-year period subsequent to the announcement (Brav et al., 2008), (Klein and Zur, 2009). This increase in shareholder value does not necessarily mean that hedge fund activism creates more wealth. While advocates of hedge fund activism claim that the increase in shareholder value results from greater efficiency in managing the company, there is also evidence that hedge fund activism reduces bondholder wealth, suggesting a transfer of wealth from bondholders to shareholders (Klein and Zur, 2011). Most of the research on hedge fund activism has been done in the United States, where Schedule 13D1 filings require the reporting entity to state the purpose of the acquisition of securities. The Netherlands have a similar regulation, where each person or legal entity that acquires more than 3% of the issued capital of an issuing institution has to report this to the AFM (Autoriteit Financiële Markten). This regulation differs from the Schedule 13D filings in that, in the Netherlands, the filer does not have to mention the purpose of the acquisition of securities. This may affect the reaction of the market on the acquisition since it is not clear what actions the hedge fund will take, or even if it will exhibit a form of activism. 1 Schedule 13D is a filing that must be submitted to the US Securities and Exchange Commission by anyone who acquires beneficial ownership of 5% or more of traded securities in a public company. Studies on hedge fund activism use 13D filings to gather their data. 5 This thesis will focus on the effect of hedge fund filings and activism on short-term shareholder value in the Netherlands and whether this effect differs from the United States. The research question of this thesis is: ‘How does hedge fund investment and activism in the Netherlands affect the short-term returns of targeted companies?’ To answer this question, three empirical analyses, in the form of two event studies and a regression, will be done. The first event study will focus on the returns of companies targeted by hedge funds. Abnormal returns will be calculated over the 30 day period surrounding the day that a hedge fund has reported its substantial interest in a company for the first time. The abnormal returns found in this event study will be used in a regression. The outcome of this regression will be used to determine whether the period of the filing, the target’s industry, and the fact that a hedge fund is an activist fund have an impact on the abnormal returns surrounding the filing date. The second event study will analyse the announcement effect of shareholder activism by hedge funds on the returns of the targeted companies. All analyses will focus on the period 01/01/2007 – 01/06/2015. The market model will be used to find the estimated returns for the targeted companies. With the estimated returns the abnormal returns for each of the targeted companies will