Abstract
This paper analyses the short- and long-term shareholder value impact of corporate restructurings initiated by activist hedge funds (AHFs) with equity ownership in the acquired or acquiring firm. Using a sample of 421 mergers and acquisitions (M&A) involving UK publicly listed companies during 1990-2017, we analyse the associations among the AHFs’ ownership in the acquiring (or acquired) firm, workforce downsizing and share price abnormal returns of the involved shareholders. Our results show that AHFs require large-scale employee lay-offs and workforce reductions around the M&A deals. In such deals acquired firm shareholders receive significantly high premiums and earn significantly high cumulative abnormal returns, while acquiring firm shareholders experience a significant decline in their long-term buy-and-hold abnormal returns. Overall, these results suggest that AHFs (with equity ownership in the acquired or acquiring firm) generate short-term shareholder gains by making labour cost cuts.