Shareholder activists are often accused of having short investment horizons and thus pushing companies to increase their stock prices at the expense of long-term shareholder value (“short-termism”). These accusations have prompted extensive research on interventions by hedge funds. In a survey of thirty years of such research, Denes et al. (2017) nevertheless conclude that the issue is still not settled.
In a recent study, we use a very different sample of activists and targeted firms from prior research to shed new light on this issue. Drawing on several sources of information, we develop a 20-year sample of 4,312 campaigns at 2,652 target firms. A key distinction from prior research is our inclusion of more than 2,000 campaigns by non-hedge fund activists (e.g., private equity firms, venture capital firms, mutual funds, insurance companies, and financial service firms). These activists, which we collectively refer to as “other private activists,” are largely unstudied, even though they constitute nearly half of activist interventions. We also develop a sample of over 2,000 interventions by hedge funds that differs from prior research, which has relied heavily on updated versions of a sample of hedge fund interventions originally developed by Brav et al. (2008).
Targeted firms have several distinct characteristics. Compared with non-targets, both types of activists favor companies that have a lower market capitalization, higher institutional ownership, greater liquidity, and lower Tobin’s Q. Compared with non-hedge-fund activists, however, hedge funds place significantly more weight on a lower market capitalization and higher institutional ownership. Hedge fund activists also prefer companies with a low dividend yield, which is not a significant consideration for other private activists.
Examining how the market reacts to intervention announcements, we first examine short-window abnormal returns and find that they are positive and economically significant for each type of activist. The average return for other private activists is about 5.5 percent which is about 1 percent higher than for hedge fund activists, but the difference is not statistically significant.
Demands to sell all, or part, of the targeted firms earn especially large returns, and interestingly, sale demands are made more frequently by other private activists than by hedge funds. Their average short-window return for sale demands is 21.42 percent, which greatly exceeds the corresponding return for hedge funds of 9.77 percent. The high return for other private activists indicates they do not demand a sale when it is unjustified.
We also find the market responds positively to most other (non-sale) demands. The short-window returns are significant for four categories of non-sale demands: 6.53 percent for a different corporate strategy, 4.16 percent for more engaged management, 3.99 percent for changed board composition, and 3.72 percent for stronger corporate governance. Finding sizable abnormal returns for a wide range of non-sale demands is important because critics have questioned whether activists create value by working with the targeted firms or simply capture existing value by demanding a sale.
Critics generally argue that the sizable positive short-window announcement returns will reverse over a longer period. We therefore next report cumulative abnormal returns for two primary post-intervention periods, each beginning one month prior to the intervention. Rather than a reversal, we find that cumulative abnormal returns are larger over 24 (36) months, at 12.77 percent (14.57 percent). Three of the four non-sale demands that have significant short window returns remain significant over 24 (36) months: changes in board composition at 16.06 percent (19.36 percent), more engaged management at 13.88 percent (17.86 percent), and corporate strategy at 13.31 percent (12.82 percent).
Even after such sizable returns, informed users do not regard the equity as overvalued. Analysts’ recommendations post-intervention become more favorable – a reversal of the pre-announcement trend – and long-term, “dedicated” institutional investors increase their ownership. We also find corroborating post-intervention improvements in operating performance (measured by return on assets) and firm valuation (measured by Tobin’s Q), further justifying the positive response by market participants. Notably, these tests compare targeted firms with propensity-score-matched samples of control firms with similar pre-intervention characteristics to ensure those characteristics do not drive our results.
We also perform a number of analyses to obtain additional insights and ensure the robustness of our results. For example, we examine how results differ based on the length or hostility of the campaign (e.g., whether the activists initiate a proxy fight) and find significant post-intervention improvements for target firms even in hostile campaigns, which is also inconsistent with the alternative explanation that activists are just good stock pickers. We also examine whether the results differ for the “first wave” (1994-2007) and “second wave” (2008-2014) of activism or around the major governance reforms associated with the Sarbanes-Oxley Act of 2002 and find generally similar inferences across periods. We also obtain similar results after including firm fixed effects or using a five-year post-intervention period.
Our study provides new evidence for the ongoing debate about the value of shareholder activism. The use of several types of evidence, some for the first time, is a distinguishing feature of our study. The argument that activism increases long-term shareholder value is hard to dismiss when several types of evidence provide consistent results and those results are observed for two types of activists.
Our study also opens an avenue for a new line of academic research on interventions by other private activists. As the classification of activists can be challenging, to facilitate such research, we have posted identifying information for our sample of activists to allow researchers to more easily identify and examine these activists.
Brav, A., W. Jiang, F. Partnoy, and R. Thomas. 2008. Hedge fund activism, corporate governance, and firm performance. Journal of Finance 63 (4): 1729–1775.
Denes, M.R., J.M. Karpoff, and V.B. McWilliams. 2017. Thirty years of shareholder activism: A survey of empirical research. Journal of Corporate Finance 44: 405–424.
This post comes to us from Professor Emeritus Edward Swanson at Texas A&M University, Professor Glen Young at Texas State University, and Professor Christopher G. Yust at Texas A&M University. It is based on their recent article, “Are All Activists Created Equal? The Effect of Interventions by Hedge Funds and Other Private Activists on Long-term Shareholder Value,” which is forthcoming in the Journal of Corporate Finance and available here.