Proceedings of the International Association for Business and Society

Volume 28, 2017

Proceedings of the Twenty-Eighth Annual Meeting

Virginia W. Gerde, Jonathan Handy, D.J. Masson
Pages 36-48

Are Hedge Funds The Big, Bad Wolf?

In general, hedge fund activist investors primarily seek to increase their equity value; however, such actions can arise from other intentions and can result in unforeseen consequences. We examine how hedge fund activism during the 1994-2007 period has impacted US companies and their subsequent environmental, social, and governance (ESG) performance. Specifically, we compare prior company ESG performance with that occurring after being targeted by a hedge fund activist investor. We use ESG ratings in a panel data analysis with stakeholder dimensions of the natural environment, the community, diversity, employees, consumers, and specific governance elements. For those firms targeted by hedge fund activists, we found that the number of environmental concerns decreased while the number of corporate governance strengths increased. Social performance was generally worse after being targeted, as targeted firms had fewer strengths in the employee, community, and product dimensions and more concerns in the employee and diversity dimensions.