August 19, 2013
Lucian Bebchuk, et al.'s Full-Throated Defense Of Activist Shareholders
Posted by David Zaring

If you haven't seen it,  Bebchuk, Brav, and Jiang have a paper out basically arguing that every argument made against activist investors is wrong.  The paper is here, and the summary is here.  If the paper is correct, then a lot of people have been conducting mistaken empirical analyses; perhaps the authors will next turn to the showing how the mistakes got made.

From the abstract:

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. 

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