Abstract

http://ssrn.com/abstract=2291577
 


 



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)

Alon Brav


Duke University - Fuqua School of Business

Wei Jiang


Columbia Business School - Finance and Economics

December 2014

Forthcoming, Columbia Law Review, Vol. 114, June 2015
Columbia Business School Research Paper No. 13-66

Abstract:     
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: 88

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

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Date posted: August 7, 2013 ; Last revised: December 5, 2014

Suggested Citation

Bebchuk, Lucian A. and Brav, Alon and Jiang, Wei, The Long-Term Effects of Hedge Fund Activism (December 2014). Forthcoming, Columbia Law Review, Vol. 114, June 2015; Columbia Business School Research Paper No. 13-66. Available at SSRN: http://ssrn.com/abstract=2291577 or http://dx.doi.org/10.2139/ssrn.2291577

Contact Information

Lucian A. Bebchuk (Contact Author)
Harvard Law School ( email )
Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)
HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Alon Brav
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)
Wei Jiang
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

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