Are All Activists Created Equal? The Effect of Interventions by Hedge Funds and Other Private Activists on Long-term Shareholder Value

Abstract

The allegation that activist investors demand changes that increase short-term stock prices at the expense of long-term shareholder value (“short-termism”) has led to extensive research on interventions by hedge funds. Few studies include other private (non-hedge fund) activists, even though we find they constitute almost half of interventions. Using a 20-year sample that includes over 2,000 interventions by each type of activist, we find that short- and long-window abnormal returns are positive and economically significant around ownership announcements for each activist, and they do not reverse. Importantly, positive returns are observed for both sale and most other (non-sale) demands. Demands to sell all, or part, of the targeted firms earn especially sizable returns, and interestingly, sale demands are made more frequently by other private activists than by hedge funds. Despite the sizable returns, informed users do not regard the equity as overvalued. Analysts’ recommendations become more favorable—a reversal of the pre-announcement trend—and long-term, “dedicated” institutional investors increase their ownership. We also find post-intervention improvements in operating performance (ROA) and firm valuation (Tobin’s Q), further justifying the positive response by market participants. Our study provides new evidence that activism increases long-term shareholder value and opens an avenue for a line of research on other private activists.

Keywords: Shareholder Activism; Activist Investors; Hedge Funds; Other Private Activists; Shareholder Value; Analyst Recommendations; Institutional Ownership

JEL Classification: G12, G23, G32, G34, G38, M41, M48