The Returns to Hedge Fund Activism in Germany


  • We are grateful to two anonymous referees, John Doukas (the editor), Günter Franke, Vijay Jog and Ike Mathur as well as participants at the European Financial Management Conference in Athens 2008, the INFINITI Conference on International Finance in Dublin 2008, the Portuguese Finance Network Conference in Coimbra 2008, the Northern Finance Association Meeting in Kananaskis Village 2008, the Annual Meeting of the Verein für Socialpolitik in Graz 2008, the Financial Management Association Meeting in Forth Worth 2008, the Symposium on Finance, Banking, and Insurance in Karlsruhe 2008, the International Tor Vergata, Conference on Banking and Finance in Rome 2008, the Conference of the Swiss Society for Financial Market Research in Geneva 2009, and the Midwest Finance Association Conference in Chicago 2009 for helpful comments and suggestions.


Recent regulatory changes in the German financial system shifted corporate control activities from universal banks to other capital market participants. Particularly hedge funds took advantage of the resulting control vacuum by acquiring stakes in weakly governed and less profitable firms. We document that, on average, hedge funds increased shareholder value in the short- and long-run. However, more aggressive hedge funds generated only initially higher returns and their outperformance quickly reversed, whereas non-aggressive hedge funds ultimately outperformed their aggressive peers. These findings suggest that aggressive hedge funds attempt to expropriate the target firm's shareholders by exiting at temporarily increased share prices.