Hedge Funds vs. Private Equity Funds as Shareholder Activists – Differences in Value Creation

(Please do not quote) This paper analyzes market reactions triggered by announcements that hedge funds and pri-vate equity investors purchase large blocks of voting rights. We argue that changes in share-holders ’ wealth are related to the opportunity, possibility and motivation of being an active blockholder, who successfully reduces agency problems. The investigation is based on a unique data set of German public listed companies and relates their short-term and long-term stock performance to several corporate characteristics and market variables. We find positive abnormal returns following an announcement that an active shareholder acquired at least 5% of a company’s voting rights. Interestingly variables proxying for agency costs explain the market reaction for our private equity sub-sample. However, ownership characteristics pro-vide only poor evidence for explaining the market reaction within our hedge fund sub-sample. Considering the long-term stock price performance, we observe considerably negative buy-and-hold abnormal returns for both samples. However, our results indicate a misinterpretation by the capital market regarding a hedge fund’s motivations and activities