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The Effects of Hedge Fund Interventions on Strategic Firm Behavior

Author

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  • Inder K. Khurana

    (Robert J. Trulaske, Sr. College of Business, University of Missouri, Columbia, Missouri 65211)

  • Yinghua Li

    (W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

  • Wei Wang

    (Fox School of Business, Temple University, Philadelphia, Pennsylvania 19122)

Abstract

We examine the impact of hedge fund interventions on target firms’ strategic behavior, specifically their voluntary disclosure and earnings management strategies. We find a decrease in both the likelihood and the frequency of management earnings forecasts conveying bad news and an increase in the level of real earnings management following interventions by hedge fund activists. Additional evidence suggests that managers substitute between voluntary disclosure and earnings management strategies in resisting hedge fund attacks. We also find that withholding of bad news is more pronounced when hedge fund activists pose greater threats to the target firm’s management and when the intervention lasts for a relatively short time period. Our results are consistent with firms behaving strategically in response to heightened career/reputation concerns and endangered corporate control arising from hedge fund activism.

Suggested Citation

  • Inder K. Khurana & Yinghua Li & Wei Wang, 2018. "The Effects of Hedge Fund Interventions on Strategic Firm Behavior," Management Science, INFORMS, vol. 64(9), pages 4094-4117, September.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:9:p:4094-4117
    DOI: 10.1287/mnsc.2017.2816
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    4. Ng, Jeffrey & Wu, Hong & Zhai, Weihuan & Zhao, Jing, 2021. "The effect of shareholder activism on earnings management: Evidence from shareholder proposals11We appreciate the helpful comments and suggestions from Stephen Taylor, Gary Biddle, Santosh Ramalingego," Journal of Corporate Finance, Elsevier, vol. 69(C).
    5. Desrousseaux, Luc, 2023. "Are activist hedge funds good business advisors?," Economic Modelling, Elsevier, vol. 125(C).

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