The Long-Term Effects of Hedge Fund Activism
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Duke University - Fuqua School of Business
Columbia Business School - Finance and Economics
Forthcoming, Columbia Law Review, Vol. 114, June 2015
Columbia Business School Research Paper No. 13-66
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 hedge funds have a detrimental effect on the long-term interests of companies and their shareholders. We subject this claim to a comprehensive empirical investigation, examining a long time window of five years following activist interventions, and we find that the claim it is not supported by the data.
We find that activist interventions are followed by improved operating performance of the target company during the five-year period following these interventions. The identified improvements are not driven by reversion to the mean of underperforming companies, and targets’ performance improves relative to that of peer companies with the same performance at the time of the intervention. Furthermore, the identified improvements in long-term operating performance are present when focusing on the two subsets of activist interventions (“investment-limiting” and “adversarial”) that are most resisted and criticized.
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. To the contrary, 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.
Our findings have significant implications for ongoing policy debates. Policymakers and institutional investors should not accept the validity of the assertions that activist interventions are costly to firms and their shareholders in the long term; they should reject the use of such claims as a basis for limiting the rights, powers and involvement of shareholders.
Number of Pages in PDF File: 87
Keywords: Corporate governance, short-termism, managerial myopia, long-term value, investor horizons, market efficiency, shareholder activism, hedge fund activism, shareholder rights, takeovers, proxy fights, takeover defenses, hedge funds
JEL Classification: G12, G23, G32, G34, G35, G38, K22
Date posted: August 7, 2013 ; Last revised: December 25, 2014
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