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The preventive effect of hedge fund activism: investment, CEO compensation and payout policies

Caroline Heqing Zhu (School of Business, Government and Economics, Seattle Pacific University, Seattle, Washington, USA)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 7 July 2020

Issue publication date: 29 April 2021




The purpose of this paper is to examine the effectiveness of hedge fund activism (HFA) in preventing corporate policy deviations.


This paper identifies HFA interventions through a hand-collected sample of Schedule 13D filings between 1994 and 2016, and uses mechanical mutual fund fire sales as the instrument variable (IV) for the likelihood of such interventions. Armed with the instrument, this paper estimates firm's distribution, managerial compensation and investment policies in response to a change in the perceived likelihood of HFA interventions.


An increase in the HFA intervention likelihood leads to increases in shareholder distribution, decreases in CEO pay and investments and increases in operating performance. Compared to the sample average, a one standard deviation increase in the intervention likelihood leads to a 9.29% increase in the firm's payout ratio, a 7.42% decrease in CEO compensation, a 2.67% decrease in capital expenditures and a 4.96% decrease in R&D expenses. These changes are consistent with the threat of intervention curbing managerial empire-building behaviors and improving firm operation. The relationships are causal, significant and robust to a variety of alternative specifications and sample divisions.


Results of this paper suggest that as a mechanism for corporate governance, the threat of HFA is effective in preventing corporate policy deviations. They also demonstrate a stronger and broader impact of HFA on corporate policy than previously documented. By showing that HFA is an effective and viable mechanism for corporate governance, this study allows policymakers to make more informed decisions to whether increase hedge fund regulations or not.



The author is indebted to Manuel Adelino, Alon Brav and John Graham for their encouragement and support. The author thanks Alfred Yawson (the editor), an anonymous referee, Ravi Bansal, Nickolay Gantchev, Simon Gervais, Oleg Gredil, Barney Hartman-Glaser, David Hsieh, Pab Jotikasthira, Hyunseob Kim, as well as seminar participants at CUNY, Duke University, University of Oklahoma and Western University for helpful discussions and comments. All errors are the author's responsibility.


Zhu, C.H. (2021), "The preventive effect of hedge fund activism: investment, CEO compensation and payout policies", International Journal of Managerial Finance, Vol. 17 No. 3, pp. 401-415.



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