Book Reviews

Over the past two decades, shareholder activism has become an important element of the corporate governance landscape, with hedge funds and private equity firms starting to play an increasingly prominent role. Although hedge fund and private equity activism is widely discussed, it remains poorly understood, with scarce large-sample empirical evidence on the firms that these activists target, their strategic objectives, and the performance effects from their initiatives. Anecdotal evidence suggests that fund activism has achieved a certain degree of success in reshaping target firms, encouraging restructurings, mergers, and dividend recapitalizations, and the replacement of management and board members. Yet critics and regulators question whether hedge fund and private equity activists benefit shareholders, with numerous claims that their interventions destroy value by distracting managers from long-term projects. Institutional Investor Activism: Hedge Funds and Private Equity, Economics and Regulation is a collection of essays wherein leading corporate governance scholars examine various aspects of the activism model adopted by now-prominent hedge funds and private equity firms, their strategies, performance, economic consequences, as well as the regulatory framework in which they operate, with important implications for both accounting research and pedagogy. This book consists of an introduction and 20 chapters that you can read collectively or reference selectively as described below. The chapters originated from presentations made at the Activist Investors, Hedge Funds and Corporate Governance Conference organized by the European Corporate Governance Institute, the University of Amsterdam Center for Law and Economics, and the Vanderbilt University School of Law in March 2007. Part I of the book (Chapters 2–4) reviews the evolution and state of shareholder activism in the U.S. and Europe. Chapter 2 (by Stuart L. Gillan and Laura T. Starks) summarizes the history of shareholder activism in the U.S., from the SEC’s adoption of Rule 14a-8 in 1943, through the initiation of pension fund activism in the mid-1980s and the emergence of hedge fund activity in the last 30 years. In reviewing related empirical studies, the authors highlight a lack of consistent evidence on the corporate effects of shareholder initiatives. While some studies have found positive short-term market reactions to announcements of certain kinds of activism, there is little evidence of significant changes in the business activities and longterm performance of companies targeted by shareholder initiatives. The recent emergence of hedge fund activism has provided some evidence of significant performance gains, but the long-term effects warrant more research. In Chapter 3, Lucian A. Bebchuk critically evaluates the current U.S. legal regime, accusing the system of failing to provide shareholders with effective directorial powers. The author presents statistics of director electoral challenges over the period 1996–2005. These challenges amounted to a total of 118, across all years, equivalent to less than 12 challenges per year. Bebchuk identifies procedural expenses, uncertainties regarding rival slates of directors, and the prevalence of staggered boards as primary impediments to electoral challenges and he advances various proposals for reforming directorial elections. These reforms include, among others, granting shareholders a periodic right to replace directors, instituting a default rule of majority (rather than plurality) voting, and confidential voting. According to the author, these reforms would provide shareholders additional powers to effectively monitor and replace directors. Chapter 4 (by Peter Cziraki, Luc Renneboog, and Peter G. Szilagyi ) discusses shareholder activism in Europe. Compared to the U.S., empirical studies have been limited by data availability, and by the fact that European countries often have very diverse legal provisions governing shareholder access to proxy proposals. Analyzing a