We've got a nice donnybrook going between Lucian Bebchuk and Marty Lipton on the positive long term returns to companies subjected to campaigns by activist shareholders. Lipton believes they do not exist, Bebchuk believes they do.
Our study empirically disproves the myopic activists claim that interventions by activist hedge funds are in the long term detrimental to the involved companies and their long-term shareholders. This post responds to the main criticisms of our work in Wachtell’s memos. Below we proceed as follows:
- First, we discuss the background of how our study meets a challenge that Wachtell issued several months ago;
- Second, we highlight how Wachtell’s critiques of our study fail to raise any questions concerning the validity of our findings concerning long-term returns, which by themselves are sufficient to undermine the myopic activists claim that Wachtell has long been putting forward;
- Third, we explain that the methodological criticisms Wachtell directs at our findings concerning long-term operating performance are unwarranted;
- Fourth, we show that Wachtell’s causality claim cannot provide it with a substitute basis for its opposition to hedge fund activism;
- Finally, we explain why Wachtell’s expressed preference for favoring anecdotal evidence and reports of experience over empirical evidence should be rejected.
It is all getting quite tasty indeed, and Bebchuk's memo is pretty compelling stuff. He's of course not alone, either. To name but one paper I've seen recently, Paul Rose and Bernie Sharfman have a new paper that also reviews the economic literature, and concluding that "Empirical studies have repeatedly shown that certain types of offensive shareholder activism lead to an increase in shareholder wealth."
The empirical question, it seems to me, is not a straightforward one - it is difficult to compare firms that activists do target with firms that they do not, and difficult of course to know what would have happened had a firm not been targeted. I take it that the case against activist shareholders is unimpeachably logical, and very Chicago. In efficient markets it should not be possible to realize long terms gains through management changes, for the companies targeted would be making said changes anyway. And for examples of studies along these lines, you can look at this or this case.
But this is not meant as a critique, rather as a scene setter - if you want critique, you'll have to read the papers themselves. As long as we see more tasty memos in this fight, you can expect to see them on this here blog.
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