Hedge Funds, Corporate Governance, and Information Acquisition
Authors:   , Kirmse Tanja Katharina , Lowry Michelle 
Published: September 2023

Observing information acquisition by various market participants can yield valuable insights into the goals and strategies of investors, firms, and regulators. My dissertation uses a unique dataset, which captures 'clicks' on companies' SEC filings, to answer three questions related to hedge fund activism. First, I use activist hedge funds' views of SEC filings to proxy for negotiations between those activists and firms. I find that negotiations are common and associated with governance changes. The second essay examines the reactions of firms to elevated activist hedge fund interest. We find that firms use shareholder rights plans ('poison pills') in an effort to discourage activists' share accumulation, and that such plans are successful at decreasing the probability 13D and DEF14A filings. Finally, hedge fund activism does not occur in isolation. The third essay examines spillover effects of hedge fund activism on the emissions of the target's peer firms. We find that while hedge fund activism targets decrease their emissions, their peers increase emissions, effectively negating the direct effect. This finding is particularly strong when peers are less likely to be subject to enforcement, and face more competitive pressures. Essay 1: A portion of hedge funds' engagement can be observed through their votes and regulatory filings. However, much of their communication occurs through direct interaction with management, which is not formally recorded. I use SEC EDGAR log file data to proxy for such engagements. This proxy indeed captures hedge fund interest: one hedge fund click more than doubles the probability of an activism event. Moreover, consistent with hedge fund clicks proxying for behind-the-scenes engagement, these clicks predict corporate governance changes, for example CEO and director turnover, even in the absence of a formal activist filing. I estimate that private activism constitutes at least 31% of all hedge fund activism, and potentially as much as 89%. Private activism is particularly likely when boards have more bargaining power, as proxied by a classified board or dual class share structure, and when directors have higher reputational concerns, as proxied by these individuals having more outside board seats. Essay 2: We provide the first systematic evidence of contractual innovation in the terms of poison pill plans. In response to the increase in hedge fund activism, pills have changed to include anti-activist provisions, such as low trigger thresholds and acting-in-concert provisions. Using unique data on hedge fund views of SEC filings as a proxy for the threat of activists' interventions, we show that hedge fund interest predicts pill adoptions. Moreover, the likelihood of a 13D filing declines after firms adopt "anti-activist" pills, suggesting that pills are effective in deterring activists. The results are particularly strong for "NOL" pills that, due to tax laws, have a five percent trigger. Our analysis has implications for understanding the modern dynamics of market discipline of managers in public corporations and evaluating policies that regulate defensive tactics. Essay 3: Existing research shows that hedge fund activism decreases target firms' emissions. However, we document a negative spillover effect from hedge fund activism: hedge fund activism leads to a 1.1 percent increase in emissions by industry rivals. Evidence suggests that the increase in emissions stems from a reduction in environmentally friendly practices rather than a drop in production. The increase is larger for rival firms closer to default, with low profitability, and those operating in a competitive environment. Collectively, these results are consistent with a product market channel, where industry rivals cut environmental expenditure to compete against a more efficient target firm. Accounting for this spillover effect, an additional activism campaign, on average, leads to an increase in emissions of 135 thousand pounds at the industry level, or 0.75 percent increased emissions. Overall, our findings highlight the importance of considering spillover effects when evaluating how shareholder activism affects other stakeholders.