Hedge funds, corporate governance and information acquisition

PhD Candidate Tanja Kirmse of the finance department will be defending her dissertation, “Hedge funds, corporate governance and information acquisition,” on June 1, 2023.

The time and location of her dissertation defense is 11 a.m.–1 p.m., GHall 722 and Zoom.

Many thanks to Kirmse’s dissertation committee:

• Committee Chair: Michelle Lowry – Professor – Drexel University
• Committee Member: Naveen Daniel – Associate Professor- Drexel University
• Committee Member: Eli Fich – Professor – Drexel University
• Committee Member: Greg Nini – Associate Professor – Drexel University
• Committee Member: Nicole Boyson – Professor – Northeastern University

Abstract:
Observing information acquisition by various market participants can yield valuable insights into the goals and strategies of investors, firms, and regulators. My dissertation uses a unique dataset, which captures “clicks” on companies’ SEC filings, to answer three questions. First, I use activist hedge funds’ views of SEC filings to proxy for negotiations between those activists and firms. I find that negotiations are common and associated with governance changes. The second essay examines the reactions of firms to elevated activist hedge fund interest. We find that firms use shareholder rights plans (“poison pills”) in an effort to discourage activists’ share accumulation, and that such plans are successful at decreasing the probability 13D and DEF14A filings. Finally, even non-shareholders use SEC information to make decisions. We show that clicks by the Environmental Protection Agency (EPA) are correlated with enforcement decisions. Using clicks as a proxy for EPA interest in a firm, we examine how the EPA weighs environmental and economic benefits.

Essay 1: A portion of hedge funds’ engagement can be observed through their votes and regulatory filings. However, much of their communication occurs through direct interaction with management, which is not formally recorded. I use SEC EDGAR log file data to proxy for such engagements. This proxy indeed captures hedge fund interest: one hedge fund click more than doubles the probability of an activism event. Moreover, consistent with hedge fund clicks proxying for behind-the-scenes engagement, these clicks predict corporate governance changes, for example CEO and director turnover, even in the absence of a formal activist filing. I estimate that private activism constitutes at least 26% of all hedge fund activism, and potentially as much as 56%. Private activism is particularly likely when boards have more bargaining power, as proxied by a classified board or dual class share structure, and when directors have higher reputational concerns, as proxied by these individuals having more outside board seats.

Essay 2: We provide the first systematic evidence of contractual innovation in the terms of poison pill plans. In response to the increase in hedge fund activism, pills have changed to include anti-activist provisions, such as low trigger thresholds and acting-in-concert provisions. Using unique data on hedge fund views of SEC filings as a proxy for the threat of activists’ interventions, we show that hedge fund interest predicts pill adoptions. Moreover, the likelihood of a 13D filing declines after firms adopt “anti-activist” pills, suggesting that pills are effective in deterring activists. The results are particularly strong for “NOL” pills that, due to tax laws, have a five percent trigger. Our analysis has implications for understanding the modern dynamics of market discipline of managers in public corporations and evaluating policies that regulate defensive tactics.

Essay 3: The Environmental Protection Agency (EPA) is responsible for implementing and enforcing environmental regulations. However, little is known about what information affects the EPA’s decisions. This paper uses granular data on the EPA’s information acquisition to show how financial disclosures inform the regulator’s decision-making.