What does recent academic research say about activist investing?

July 18th, 2010
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Contributed by: Michael R. Levin, The Activist Investor
Generally it works, and sometimes it works really, really well. Investors often wonder whether activist investing truly delivers “alpha” – returns above a relevant index. Is it worth the time, energy, money, and heartburn?

Until recently the scant evidence on activist investing showed at best mixed results. Various scholars studied the corporate raiders and LBOs of the 1980s and 1990s, with conclusions ranging from value-destroying to value-enhancing. Anecdotes and accounts of individual successes and failures abound. Activist investors as we know and define them have labored at the craft since at least the early- to mid-1990s, so how about a rigorous study or two, with a large sample and proper analysis?

Well, now we have a few better instances with which to work. If you want to skip right to the homework assignment, see the end of the post. You can link to all of the papers cited, as well.

Initial efforts to improve this research centered on evaluating the impact of better corporate governance on equity returns:

• Gompers, Ishii, and Metrick wrote the seminal paper on this subject, in which they identify and analyze 24 different corporate governance factors, way back in 2003.

• Lucian Bebchuk, the Harvard Law professor with an extensive CV in activism, last year refined (with co-authors Cohen and Ferrell) the list to identify the six best factors.

Both conclude that corporate governance does affect equity returns materially. Yet, a recent working paper by Fodor and Diavatopoulos questions this result as specific to the sample of companies and time period used.

More recent research has examined the impact of activist investors, specifically hedge funds, on equity returns. An initial effort along these lines came from Gillan and Starks in 2007, which summarized a number of smaller studies that preceded them:

The evidence provided by empirical studies of the effects of shareholder activism is mixed. While some studies have found positive short-term market reactions to announcements of certain kinds of activism, there is little evidence of improvement in the long-term operating or stock-market performance of the targeted companies… The relatively recent entrance of hedge funds into shareholder activism has provided more evidence of gains from activism, but the long-term effects are still unknown and warrant more research.

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Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Hedge Fund Resources and Featured Partner News


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