M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Monday, August 26, 2013

The value of activist shareholders

OK, so there is a paper by Lucian Bebchuk et al, The Long Term Effects of Shareholder Activism, making its way around.  The paper has already generated an aggressive response from Marty Lipton  of Wachtell, Lipton that is going around by way of email.  You know you may have hit a nerve when someone throws out the "There are three kinds of lies: lies, damned lies and statistics.”  In any event, here is the abstract to the paper:

Abstract: We test the empirical validity of a claim that has been playing a central role in debates on corporate governance – the claim that interventions by activist shareholders, and in particular activist hedge funds, have an adverse effect on the long-term interests of companies and their shareholders. While this “myopic activists” claim has been regularly invoked and has had considerable influence, its supporters have thus far failed to back it up with evidence. This paper presents a comprehensive empirical investigation of this claim and finds that it is not supported by the data. 

We study the universe of about 2,000 interventions by activist hedge funds during the period 1994-2007, examining a long time window of five years following the intervention. We find no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions. These improvements in long-term performance, we find, are present also when focusing on the two subsets of activist interventions that are most resisted and criticized – first, interventions that lower or constrain long-term investments by enhancing leverage, beefing up shareholder payouts, or reducing investments and, second, adversarial interventions employing hostile tactics.

We also find no evidence that the initial positive stock price spike accompanying activist interventions fails to appreciate their long-term costs and therefore tends to be followed by negative abnormal returns in the long term; the data is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Finally, we find no evidence for concerns that activist interventions during the years preceding the financial crisis rendered companies more vulnerable and that the targeted companies therefore were more adversely affected by the crisis. 

Our findings that the considered claims and concerns are not supported by the data have significant implications for ongoing policy debates on corporate governance, corporate law, and capital markets regulation. Policymakers and institutional investors should not accept the validity of the frequent assertions that activist interventions are costly to firms and their long-term shareholders in the long term; they should reject the use of such claims as a basis for limiting the rights and involvement of shareholders.

Well, if nothing else, the contrversy surrounding the paper is generating attention for the work.  I wonder if that was Wachtell's initial idea?  My guess is no.



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Lipton's response is on the Harvard Corporate Law blog headed The Bebchuk Syllogism.

Posted by: Errol Danziger | Aug 27, 2013 7:03:17 AM

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