Hedge fund activism and corporate litigation: an analysis of securities and non-securities lawsuits

Abstract

Purpose

This study examines how corporate litigation, both securities-related and not, is affected by hedge fund (HF) activism.

Design/methodology/approach

We use a difference-in-differences (DiD) method, along with propensity score matching and firm fixed effects and a comparison of HF and non-HF activists for identification.

Findings

We find that companies that are targeted by HFs face operation-related lawsuits, mainly from stakeholders or competitors. This effect does not seem to be caused by targets' higher tendency to settle the cases. Our evidence shows that HF activists increase firm value for the target firms that are prone to litigation.

Originality/value

Therefore, our evidence supports the idea that the higher operation litigation risks are unintended consequences of improving firm efficiency through cost savings or restructuring of target firms by the activists.

Citation

Lim, Y. (2024), "Hedge fund activism and corporate litigation: an analysis of securities and non-securities lawsuits", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-11-2023-0693