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Hedge Fund Activists: Value Creators or Good Stock Pickers?

We show that hedge fund activism is associated with positive abnormal stock returns in both the short term and the long term. Using matching procedures to mitigate selection effects, we find that activists’ targets do not outperform ex ante similar control firms; this suggests that activists are good stock pickers, not value creators. Activists also exhibit strong timing skills, generally selling (buying) stocks in targeted firms during periods in which these stocks outperform (under-perform) and ahead of negative (positive) abnormal returns. These selection skills do not seem to benefit the buy-and-hold shareholders of the targeted firms.