New evidence disputes the general consensus that institutional shareholder activism has a long-term negative impact on the results of a corporation. A team of researchers from Harvard, Duke and Columbia argue, based on their empirical research, that on the contrary shareholder activism leads to improvement in both short-term and long-term results.
Critics argue that ‘myopic’ activist shareholders, especially activist hedge funds, force corporations to sacrifice long-term profits and competitiveness in order to reap quick short-term benefits. The immediate spike that comes after interventions from these activist shareholders, they argue, inevitably leads to long-term declines in operating performance and shareholder value
Three researchers, Lucian Bebchuk of Harvard Law School, Alon Brav of Duke’s Fuqua School of Business, and Wei Jiang of Columbia Business School, beg to differ. Bebchuk, Brav and Jiang argue that opponents of shareholder activism have no empirical basis for their assertions. In contrast, the research team presents the results of their own empirical research that reveals that both short-term and long-term improvements in performance follow in the wake of shareholder interventions. Neither the company nor its long-term shareholders are adversely affected by hedge fund activism.
Specifically, the researchers studied the data on 2000 interventions by activist hedge funds from 1994 – 2007. In each case, they monitored the operating performance of the impacted companies for five years following the intervention. They found no evidence of reduction in operating performance in those five years. This result applied even to the most contentious and most-criticized interventions: interventions that reduce or constrain long-term investments (for example, because shareholder pay-outs are ‘beefed up’), and adversarial interventions (for example, when activists used hostile tactics against the board). In fact, the researchers found instead that in the third, fourth and fifth year after the intervention, performance tended to be better, not worse.
They also found no evidence that the stock price spikes that followed these interventions resulted in lower-than-normal returns in the long run. Nor did they find evidence to support critics’ suggestions of so-called ‘pump and dump’ — activists pump up the price of the stock then sell it off, resulting in below-normal negative returns in the long-term.
The results of the research, by Professor Bebchuk and his colleagues, continues to elicit controversy. Proponents of the opposite view — that corporations and long-term shareholders are indeed negatively impacted by shareholder activism — have hammered the team for its research and assertions. Nevertheless Bebchuk, Brav and Jiang make a compelling case for shareholder activism that may sway ongoing policy debates on corporate governance and capital markets regulation in favour of expanding rather than limiting the rights and involvement of shareholders. Boards and their executives should carefully monitor these debates in order to prepare for corporate governance’s evolving policy environment.
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