ECONOMIC LINKS AND SPILLOVER EFFECTS OF HEDGE FUND ACTIVISM

Abstract

I study how block acquisitions by activist hedge funds affect not only the firms they target but also firms that are economically linked to the targets. I focus on supplier-customer relationships and show that when activist hedge funds acquire large stakes (at least 5% ownership) in the customer firms, they also affect their respective supplier firms, but with a delay. I find that during the event window, targeted customers and their respective supplier firms will experience an average of 5% and 2% positive abnormal stock return respectively. One month after the targeting of the customer firms, targeted customers and the respective supplier firms will experience an average of 2% and 4% positive abnormal stock return respectively. Hence, an activist hedge fund with excess capital is able to gain up to 4% additional abnormal returns by taking a stake in suppliers that are economically linked to the targeted customers. I further find that while the respective supplier firms experience positive abnormal returns, there are no clear improvements in their operating performances. Finally, I use data on media news coverage to proxy for investor’s level of attention on each firm. I find that news coverage for the targeted customers are much higher and positive around the event date while news coverage for their respective supplier firms are much lower and negative around the event date. As a result, I find that differences in media coverage along the supplier-customer relationships can explain a large part of the cross-firm predictability. This suggests that investors’ limited attention is an important friction in financial markets.