Hedge fund investor activism and human capital loss

Research summary: Prior research suggests that hedge fund activism can benefit targeted firms. We explore a potential negative side-effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that firms targeted by hedge fund activists experience a greater departure of valuable employees compared with a matched sample of non-targeted firms. Further, the positive effect of hedge fund activism on firm performance is stronger when firms experience a lower departure of valuable employees. These results suggest that hedge fund activism can lead to the unwanted loss of human capital, which may reduce the otherwise positive performance effect on targeted firms. These findings contribute to research on investor activism and human capital. Managerial summary: Hedge fund activism has been shown to benefit shareholders of targeted firms. We investigate a potential negative side-effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that targeted firms experience a greater departure of valuable employees when attacked by hedge fund activists, and that the positive performance effect of hedge fund activism is greater if that departure is smaller. Our results, together with additional analyses, are consistent with our argument that valuable employees decide to leave firms targeted by hedge fund activists to reduce the potential uncertainty and adversity for their careers, and that this human capital loss can harm firm performance. Our study has important implications for firms facing the potential prospect of hedge fund activism.