Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes U.K. Focus Fund
Free University of Brussels (VUB/ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management; European Corporate Governance Institute (ECGI)
Julian R. Franks
London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Krannert School of Management; Centre for Economic Policy Research (CEPR)
ECGI - Finance Working Paper No. 138/2006
London Business School Finance Working Paper No. FIN462
This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its U.K. Focus Fund (HUKFF). In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking. We categorize the engagements and measure their impact on the returns of target companies and the fund. We find that Hermes frequently seeks and achieves significant changes in the company's strategy including refocusing on the core business and returning cash to shareholders, and changes in the executive management including the replacement of the CEO or chairman.
Number of Pages in PDF File: 70
Keywords: Shareholder activism, institutional investors, real authority
JEL Classification: G32working papers series
Date posted: December 4, 2006 ; Last revised: April 21, 2008
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