Hedge fund investors play an increasingly influential role in shaping corporate behavior, yet their broader economic and social effects remain the subject of debate. In a new paper, we examine how hedge fund activism operates in family-controlled firms, a common but understudied ownership structure in which founding families retain significant control over corporate decisions.
Family-controlled firms differ fundamentally from widely held corporations. While family control can promote long-term vision and stability, it can also weaken accountability and limit the effectiveness of traditional governance mechanisms. The central question addressed in our paper is whether hedge fund activists can improve such firms and if so, how.
We find, first, that hedge fund activists are less likely to target family firms, reflecting the higher barriers of concentrated ownership and entrenched control. Second, when activists do intervene, they are more effective than in non-family firms, generating greater improvements in firm value, transparency, and governance. These findings suggest that activism is especially important where other forms of external discipline are weak.
Why Family Firms Matter
Family-controlled firms account for a substantial share of publicly listed companies, both in the United States and globally. Founders or their descendants often hold senior positions or board seats and exert outsized influence over corporate decisions. While this structure can align the incentives of owners and managers, it can also create tensions between controlling families and minority shareholders. Family owners may resist changes that threaten control, extract private benefits, or reduce transparency.
These features make family firms a challenging environment for outside investors seeking change. Hedge fund activists – investors who acquire stakes in companies and push for strategic, operational, or governance reforms – are therefore expected to face greater resistance in family firms. At the same time, precisely because governance frictions are more severe, the potential gains from successful intervention may be larger.
Do Activists Avoid Family Firms?
The evidence shows that hedge fund activists do, in fact, target family firms less frequently. Even after accounting for firm size, profitability, growth prospects, and other characteristics, family-controlled firms are significantly less likely to be targets of activist campaigns. This pattern reflects the higher costs of engagement: Activists must contend with concentrated voting power, stronger emotional attachment to control, and institutional structures that insulate family owners from outside pressure.
Importantly, this avoidance does not appear to stem from family firms being better governed or less in need of reform. Instead, our paper’s later results show that when activism occurs, the impact is substantial, suggesting that activists selectively engage only when the expected payoff justifies the difficulty.
Market Reactions Signal Larger Potential Gains
When hedge fund activists target family firms, financial markets respond more positively than they do for non-family firms. Stock prices rise significantly more around the announcement of activist campaigns, indicating that investors expect greater value creation. This reaction reflects a belief that activists can unlock value constrained by entrenched control or opaque governance.
How Activism Creates Value in Family Firms
The paper identifies several ways hedge fund activism improves family firms.
First, activism plays a key role in revitalizing the market for corporate control. Family owners often resist takeovers, even when a sale could benefit shareholders, because of private benefits tied to control, legacy, or identity. We find that activist intervention significantly increases the likelihood that family firms will be acquired, suggesting that activists help overcome resistance to value-enhancing transactions rather than merely targeting firms already poised for sale.
Second, activism leads to improvements in operating performance and valuation, even when firms remain independent. Family firms targeted by activists experience stronger gains in profitability and market valuation than do non-family targets. These improvements persist over time, indicating that activists drive real operational changes rather than short-term financial engineering.
Third, activism improves corporate transparency. Family firms are often more opaque, making it harder for outside investors to assess performance and risks. After activist intervention, family firms show clearer financial reporting and attract greater analyst coverage. This enhanced transparency reduces information asymmetries and limits opportunities for insiders to hide poor performance.
Fourth, improved transparency reduces downside risk. The study finds that family firms targeted by activists experience a meaningful decline in the likelihood of sharp stock price crashes, which are often associated with the sudden release of accumulated bad news. This suggests that activism not only boosts average performance, but also improves risk profiles for investors.
Broader Implications
The findings have important implications for investors, regulators, and policymakers.
For investors, the results highlight that hedge fund activism can be particularly valuable in firms with entrenched ownership, even though such interventions are more difficult and less frequent. For activists, the paper clarifies where the greatest opportunities for value creation may lie – in firms where governance frictions are severe but not insurmountable.
For policymakers, the study underscores the role of activist investors as a complementary governance mechanism. Where boards, dispersed shareholders, and takeover markets are less effective – such as with family-controlled firms – activism can help protect minority shareholders and improve accountability without direct regulatory intervention.
More broadly, the paper contributes to debates about the role of activist investors in the economy. Rather than being purely disruptive or short-term oriented, hedge fund activism can serve as a corrective force where entrenched control limits efficiency and transparency.
Bottom Line
Family firms are harder – but more rewarding – targets for hedge fund activism. Although activists intervene less frequently in these firms, their interventions generate larger gains by overcoming entrenched control, improving transparency, facilitating efficient ownership changes, and enhancing long-term performance. Our study suggests that the true value of activism lies not in easy targets, but in challenging governance environments where the potential for improvement is greatest.
Heng An is an associate professor at the University of North Carolina at Greensboro, and Xu Niu is an assistant professor at James Madison University College of Business. This post is based on their recent paper, “Hedge Fund Activism and Value Creation in Family Firms,” available here.