Thesis
Hedge funds : regulation, activism and corporate decisions
- Creator
- Rights statement
- Awarding institution
- University of Strathclyde
- Date of award
- 2022
- Thesis identifier
- T16264
- Person Identifier (Local)
- 201558478
- Qualification Level
- Qualification Name
- Department, School or Faculty
- Abstract
- The hedge fund industry has expanded at a spectacular growth rate in terms ofassets under management and the number of active hedge funds. The stake and ability ofhedge funds to influence the board and managerial decisions make it optimal for them toengage in costly information search, thereby performing monitoring and discipliningroles. Similarly, the influence of hedge funds on corporate decisions and their potentiallydestabilising power, specifically when they themselves maintain a high degree of opacityat the core of their strategy and specialism, has attracted regulatory concern. Motivated bythese concerns that are significant to regulators and policy-making bodies, my thesisexamines important aspects of hedge funds which is divided into three empirical chapters.This PhD thesis, comprised of three empirical chapters, assesses the activity ofhedge funds and the regulatory environment facing hedge funds and offers new insightson hedge funds' behaviour and corporate consequences.The first empirical chapter sheds light on the ongoing debate of whether a hedgefund needs to be regulated. To do so, the first empirical chapter conducts a comparativestudy of before and after hedge fund regulations in Europe and the US (namely DoddFranc Act (DFA) in the US and Alternative Investment Fund Managers Directive(AIFMD) in Europe). An empirical investigation in my first chapter documents the starkeffect of hedge fund disclosure regulations on fund performance in Europe in contrast towhat is documented in the US studies. The post AIFMD period in Europe experiences anincrease in performance contrary to a decline in performance documented in a previousstudy in the US. The results show that the increase in performance in the European hedge fund is not limited to the firms affected by the AIFMD alone and has a positive spillovereffect on the small funds unaffected by the regulation. The second important revelation ofmy first empirical chapter is that AIFMD in Europe seems to favour smaller funds as thepost-AIFMD-period witnesses improvement in the performance of smaller funds. Assuch, European evidence is suggestive of the distributional effect of hedge fund regulationbenefitting the performance of otherwise constrained small funds. In my third and finalset of enquiries, I investigate the volatility consequence of hedge fund regulation anddocument that the overall fund return volatility has fallen both in the US and Europe. Inthe ongoing debate in the literature on the merits and demerits of hedge fund regulation,the findings shed important light on the positive volatility outcome of hedge fundregulation.The second empirical chapter examines firm and industry antecedents of hedgefund activism and documents that the propensity to be an activist target positively dependson the firm and industry characteristics related to agency and information-relatedproblems. This chapter further examines whether competitive forces positively ornegatively affect the propensity to attract hedge fund activism. The economic argumentspresent an unsettled prediction of the effect of industry-level competition and hedge fundactivism. According to one side of this debate, competition minimises the danger ofasymmetric information to less-informed investors by allowing informed investors totrade together, resulting in more information being captured in the equilibrium price.Therefore, competitive force substitutes, at least in part, the negative effect of asymmetricinformation. The central postulation of this view is that Hedge Fund activists couldspecialise as informed investors lowering the information asymmetry. The alternative view is that, in a monopolistic market, firms possess market power to the extent ofcoercing prices and output. This may lead to a situation where the value of activism maynot translate into eliminating underperformance and undervaluation in the concentratedsectors. The chapter's empirical findings suggest that hedge fund activism is negativelyassociated with market competition in support of the substitutive argument. The thirdimportant revelation in this chapter is the empirical investigation of antecedents of hedgefund activism before and after the change in regulatory and information environmentfacing hedge funds, i.e. before and after hedge fund regulations (HFRs, henceforth). Theempirical enquiry documents that the regime change in the information environmentcreated by hedge fund regulations has enabled activist hedge funds to target firms that aremore conservative or are financially constrained. Therefore, hedge fund regulations couldbe considered to complement and support the information environment for a hedge fundto assess a target and do not necessarily play a substitutive role in information creation asspeculated in the literature.The third empirical chapter investigates the impact of hedge fund activism (HFA)on corporate risk-taking and documents that hedge fund targeted firms would pursueinvestment conservatism, however aggressive debt policy, thereby directing firms towardshort-termism. However, the market seems to reward this short-termistic risk-taking in theform of positive market reactions to hedge fund activism announcements. The secondimportant revelation of the empirical study is that passive hedge funds that turn activistsin the later stage would take their familiarity with internal dynamics to further increaseshort-term oriented risk-taking by exposing the firm to higher earnings volatility and amore levered balance sheet while shunning investment and dividends. This study implies that the policy discussion should take into account risk-taking consequences that wouldhave long-term costs of hedge fund activism.Taken together, the thesis highlight the merit of regulation to produce, at least inpart, positive market outcomes of lowering return volatility. Return volatility of hedgefunds could destabilise the market as they could trigger liquidity dry-ups and volatilityspill-overs to the corporate sector. To this end, the thesis underscores the merit ofregulating hedge funds. This thesis also sheds important insights on drivers of hedge fundactivism and documents the success of hedge funds in correcting firm-level frictions ofunderperformance and undervaluation of the target firms. However, notwithstanding theirsuccess in identifying and correcting underperformance and undervaluation, in theaftermath, they increase the risk-taking of target firms to pursue corporate short-termism.Thus this thesis provides insights to regulators and investors to assess the long termconsequences of hedge fund activism in the debate of the overall merit of the wolves(hedge funds) at the door (activism).
- Advisor / supervisor
- Paudyal, Krishna
- Tang, Leilei
- Resource Type
- DOI
- Funder
Relações
Itens
| Miniatura | Título | Data de carga | Acesso | Ações |
|---|---|---|---|---|
|
|
PDF of thesis T16264 | 2022-06-08 | Público | Baixar |