Disappearing Discounts : Hedge Fund Activism in Conglomerates

Hedge fund activism removes the diversification discount in targeted conglomerate firms. Targeted conglomerates increase investment in segments with better growth opportunities, while reducing each division's over-reliance on their own cash flow relative to their reliance on cash flows from other segments. These improvements are stronger when firms are ex-ante financially constrained, when CEOs are subsequently replaced by outsiders, and when payout is subsequently increased. Refocusing is no more valuable than increasing internal efficiency. The results are not driven by mean reversion. The results are consistent with hedge funds' skill in unlocking the value of internal capital markets in diversified firms