LAUSR

Firms targeted by hedge fund activists experience significantly higher returns when there are fewer external monitors in place at the target firm. Using analyst coverage and institutional ownership as measures of external monitoring presence, we find that low-monitored activist targets experience abnormal returns 17.52% above that of high-monitored targets in the two-year period following the initial campaign start date. The significant effect of external monitoring remains after controlling for target firm and activist characteristics. We also document improved operating performance and an increased monitoring presence at low-monitored target firms across the same two-year period, consistent with the observed market performance.