Can the market identify prosperous activist engagements? Evidence from announcement and long-term buy-and-hold returns

Abstract

We document a discrepancy between abnormal announcement returns (CAARs) and two-year buy-and-hold abnormal returns (BHARs) of activist engagements. Activist targets that earn the highest two-year BHARs do not yield significantly higher CAARs around engagement announcements than the remaining targets. This indicates that financial markets cannot distinguish between long-term top-performing engagements and other engagements at the announcement of an engagement. Even the best activists frequently suffer low or negative two-year BHARs. Short-term CAARs around engagement announcements are linked to activist characteristics, whereas long-term results are not. Long-term top-performing targets have significantly different firm characteristics compared to the remaining targets. However, activists do not solely engage in such targets, and financial markets are unable to initially identify such firms. Thus, we conclude that the long-term performance of target firms seems to be driven by a combination of target firm characteristics, investor skills, and luck, but such performance provides no reasonable follow-on investment strategy for investors.

Keywords: shareholder activism, international evidence, hedge funds, non-hedge fund activism, institutional investors

JEL Classification: G34, G23, G15