Hedge Fund Activism in Corporate Governance
Hedge fund activism is an important disciplinary mechanism in corporate governance. It consists in actions aimed to change the way a company is managed, without trying to gain control. Because hedge funds aim to profit from these actions, this is called entrepreneurial shareholder activism.
A hedge fund campaign can only succeed if a majority of institutional shareholders supports it. The question whether hedge fund activism leads to inefficient short termism in corporate governance can only be answered by looking at which investors are decisive on such campaigns. Although the empirical evidence on this is still unclear, index funds seem to be decisive in most instances.
Because of their incentives, index fund managers cannot be trusted to make an informed decision about whether the company should be managed for the short term or the long term. It turns out that the optimal choice in this respect varies with the individual companies and with time. As a result, companies...
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