Fund Structure, Investor Protection, and the Long-Run Performance of Activism

This paper investigate the effects of investor protection on hedge fund activism. Using a parsimonious measure of investor protection constructed from fund organizational characteristics, we document that higher investor protection is strongly correlated with superior performance of activists. Companies targeted by activists with better investor protection provides roughly 22% higher return per year than those targeted by activists with poor protection. Outperformance of target firms is also measured in return-on-assets and valuation ratios. The effect is neither explained by superior target selection ability nor by takeover activity, but rather by increased operational efficiency and reduced the agency costs of the target firms. The paper’s findings are consistent with the extant literature that a better investor protection encourages efficient investment through promoting higher valuation and reducing agency costs.