Is Hedge Fund Activism New Hope for the Market?

Abstract

The American corporate system is characterized by separation of ownership and control. In theory, shareholders monitor the elected directors, who manage the company as the shareholders’ fiduciaries. However, many experts regard shareholder passivity as inevitable. This is troubling because without robust monitoring, managers can use their discretion to make business decisions that benefit themselves at the cost of shareholders. The emergence of hedge fund activism may offer new solutions to the shareholder passivity dilemma as hedge fund activists engage in vigorous oversight. If hedge fund activists’ interest are in line with the interests of their target companies, such activism may enhance the values of their target companies. If not, practitioners and academic commentators worry that hedge fund activism could generate negative results. This Note explores the impact of hedge fund activism on the market and concludes that the market as a whole will likely benefit.