Why do companies become hedge fund targets? Evidence from shareholder activism in Germany

Regulatory changes in Germany since the beginning of the new millennium shifted corporate control activities from banks to capital markets. Hedge funds exploited these governance changes by acquiring equity stakes in weakly governed firms, which subsequently outperformed, except during the global financial crisis. For 653 shareholder activism events over the period 2000–2020, we observe that hedge funds are more likely to target smaller firms with less ownership concentration, with higher financial visibility, higher sales growth, higher profitability, lower leverage, greater diversification and higher institutional ownership. Although hedge funds became less aggressive, the optimal strategy protecting management against activism is to create shareholder value.