Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-05T19:42:22.720Z Has data issue: false hasContentIssue false
  • English
  • Français

Loss-Driven Activism

Published online by Cambridge University Press:  23 February 2024

Marco Elia Open the ORCID record for Marco Elia [Opens in a new window]
Marco Elia*
Affiliation:
Queensland University of Technology School of Economics and Finance
*
[email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

I show that hedge funds react to unrealized losses on their passive positions by engaging with the management. The hedge fund managers’ psychological response is consistent with cognitive dissonance: They blame the firms’ management and switch to activism. The loss, which is hedge fund-investment specific, is distinct from economic factors such as the firm’s industry-adjusted performance. Loss-driven activism is more likely to be unfocused on specific issues and results in worse firm performance. This study shows that an overlooked consequence of unrealized losses is to trigger an active engagement with the firm.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 33
Copyright
© Crown Copyright – Queensland University of Technology, 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I would like to thank my dissertation committee members, Naveen Daniel, Daniel Dorn, Kose John, Greg Nini, and Ralph Walkling for the valuable suggestions and support. I am grateful for helpful comments from an anonymous referee, Ran Duchin (the editor), Ettore Croci, Eli Fich, Vyacheslav (Slava) Fos, Michelle Lowry, Ludovic Phalippou, Silvina Rubio, Emil Siriwardane, David Solomon (a referee), Laura Starks as well as seminar participants at Drexel University, Queensland University of Technology, Cornerstone Research, University of Technology Sydney, the 2017 Financial Management Association European Conference, the 2017 European Finance Association Conference Doctoral Tutorial, the 2017 Financial Management Association Doctoral Consortium and Special PhD Student Paper Presentation Sessions, the 2018 American Finance Association Annual Meeting Ph.D. Poster Session, the 2018 FIRN Annual Conference, the 2019 UBS The Future of Investment Management Conference, the 2019 China International Conference in Finance Annual Meeting, and the 2019 American Finance Association Annual Meeting. An earlier version of this paper was titled “What Causes Passive Hedge Funds to Become Activists?”

References

Aragon, G. O., and Martin, S. J.. “A Unique View of Hedge Fund Derivatives Usage: Safeguard or Speculation?” Journal of Financial Economics, 105 (2012), 436–456.CrossRefGoogle Scholar
Aslan, H., and Kumar, P.. “The Product Market Effects of Hedge Fund Activism.” Journal of Financial Economics, 119 (2016), 226–248.CrossRefGoogle Scholar
Baker, M.; Pan, X.; and Wurgler, J.. “The Effect of Reference Point Prices on Mergers and Acquisitions.” Journal of Financial Economics, 106 (2012), 49–71.CrossRefGoogle Scholar
Barberis, N., and Xiong, W.. “Realization Utility.” Journal of Financial Economics, 104 (2012), 251–271.CrossRefGoogle Scholar
Ben-David, I., and Hirshleifer, D.. “Are Investors Really Reluctant to Realize Their Losses? Trading Responses to Past Returns and the Disposition Effect.” Review of Financial Studies, 25 (2012), 2485–2532.CrossRefGoogle Scholar
Boyson, N. M.; Gantchev, N.; and Shivdasani, A.. “Activism Mergers.” Journal of Financial Economics, 126 (2017), 54–73.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; and Kim, H.. “The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes.” Review of Financial Studies, 28 (2015), 2723–2769.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; and Rongchen, L.. “Governance by Persuasion: Hedge Fund Activism and the Market for Corporate Influence.” European Corporate Governance Institute Finance Working Paper No. 797/2021 (2021).CrossRefGoogle Scholar
Brav, A.; Jiang, W.; Ma, S.; and Tian, X.. “How Does Hedge Fund Activism Reshape Corporate Innovation?” Journal of Financial Economics, 130 (2018), 237–264.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; Partnoy, F.; and Thomas, R.. “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance, 45 (2008), 391–413.Google Scholar
Chang, T. Y.; Solomon, D. H.; and Westerfield, M. M.. “Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect.” Journal of Finance, 71 (2016), 267–302.CrossRefGoogle Scholar
Clifford, C. P. “Value Creation or Destruction? Hedge Funds as Shareholder Activists.” Journal of Corporate Finance, 14 (2008), 323–336.CrossRefGoogle Scholar
Clifford, C. P., and Lindsey, L.. “Blockholder Heterogeneity, CEO Compensation, and Firm Performance.” Journal of Financial and Quantitative Analysis, 51 (2016), 1491–1520.CrossRefGoogle Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.Google Scholar
Dittmar, A.; Duchin, R.; and Zhang, S.. “The Timing and Consequences of Seasoned Equity Offerings: A Regression Discontinuity Approach.” Journal of Financial Economics, 138 (2020), 254–276.CrossRefGoogle Scholar
Edmans, A.; Fang, V. W.; and Zur, E.. “The Effect of Liquidity on Governance.” Review of Financial Studies, 26 (2013), 1443–1482.CrossRefGoogle Scholar
Festinger, L. A Theory of Cognitive Dissonance. Stanford, CA: Stanford University Press (1957).CrossRefGoogle Scholar
Frazzini, A. “The Disposition Effect and Underreaction to News.” Journal of Finance, 61 (2006), 2017–2046.CrossRefGoogle Scholar
Frydman, C.; Barberis, N.; Camerer, C.; Bossaerts, P.; and Rangel, A.. “Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility.” Journal of Finance, 69 (2014), 907–946.CrossRefGoogle Scholar
Gantchev, N. “The Costs of Shareholder Activism: Evidence from a Sequential Decision Model.” Journal of Financial Economics, 107 (2013), 610–631.CrossRefGoogle Scholar
Gantchev, N.; Gredil, O. R.; and Jotikasthira, C.. “Governance Under the Gun: Spillover Effects of Hedge Fund Activism.” Review of Finance, 23 (2019), 1031–1068.CrossRefGoogle Scholar
Genesove, D., and Mayer, C.. “Loss Aversion and Seller Behavior: Evidence from the Housing Market.” Quarterly Journal of Economics, 116 (2001), 1233–1260.CrossRefGoogle Scholar
Greenwood, R., and Schor, M.. “Investor Activism and Takeovers.” Journal of Financial Economics, 92 (2009), 362–375.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “What Makes Investors Trade?” Journal of Finance, 56 (2001), 549–578.Google Scholar
Heath, C.; Huddart, S.; and Lang, M.. “Psychological Factors and Stock Option Exercise.” Quarterly Journal of Economics, 114 (1999), 601–627.CrossRefGoogle Scholar
Jiang, W.; Li, T.; and Mei, D.. “Influencing Control: Jawboning in Risk Arbitrage.” Journal of Finance, 73 (2018), 2635–2675.CrossRefGoogle Scholar
Kahn, C. M., and Winton, A.. “Ownership Structure, Speculation, and Shareholder Intervention.” Journal of Finance, 53 (1998), 99–129.CrossRefGoogle Scholar
Kahneman, D., and Tversky, A.. “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica, 47 (1979), 263–292.CrossRefGoogle Scholar
Klein, A., and Zur, E.. “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.” Journal of Finance, 64 (2009), 187–229.CrossRefGoogle Scholar
Locke, P. R., and Mann, S. C.. “Professional Trader Discipline and Trade Disposition.” Journal of Financial Economics, 76 (2005), 401–444.CrossRefGoogle Scholar
Lu, Y.; Ray, S.; and Teo, M.. “Limited Attention, Marital Events and Hedge Funds.” Journal of Financial Economics, 122 (2016), 607–624.CrossRefGoogle Scholar
Maug, E. “Large Shareholders as Monitors: Is There a Trade-Off Between Liquidity and Control?” Journal of Finance, 53 (1998), 65–98.CrossRefGoogle Scholar
Norli, O.; Ostergaard, C.; and Schindele, I.. “Liquidity and Shareholder Activism.” Review of Financial Studies, 28 (2015), 486–520.CrossRefGoogle Scholar
Odean, T. “Are Investors Reluctant to Realize Their Losses?” Journal of Finance, 53 (1998), 1775–1798.CrossRefGoogle Scholar
Shefrin, H., and Statman, M.. “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence.” Journal of Finance, 40 (1985), 777–790.CrossRefGoogle Scholar
Starks, L. T.; Yong, L.; and Zheng, L.. “Tax-Loss Selling and the January Effect: Evidence from Municipal Bond Closed-End Funds.” Journal of Finance, 61 (2006), 3049–3067.CrossRefGoogle Scholar
Tversky, A., and Kahneman, D.. “Advances in Prospect Theory: Cumulative Representation of Uncertainty.” Journal of Risk and Uncertainty, 5 (1992), 297–323.CrossRefGoogle Scholar
Zuchel, H. “What Drives the Disposition Effect?” Working Paper, Universität Mannheim (2001).Google Scholar
Supplementary material: File

Elia supplementary material

Elia supplementary material
Download Elia supplementary material(File)
File 144.8 KB