Are Activist Investors Good or Bad for Business? Evidence from Capital Market Prices, Informed Traders, and Firm Fundamentals
59 Pages Posted: 18 Aug 2016 Last revised: 6 Apr 2017
Date Written: March 31, 2017
For a large sample that extends over two decades, we examine five different types of evidence to determine whether interventions by activist investors increase shareholder value. We find short-window returns around the announcement of an activist share purchase are sizable and do not reverse in a two-year, post-intervention period. The increase is greatest for demands to sell all, or part, of the target firm but is still significant for other demands. Many critics of activism maintain the market is being misled. We therefore investigate how market participants who invest heavily in information respond, since they are likely to be knowledgeable about the long-term impact of activism. Despite an often sizable price increase around the activist announcement, analyst buy recommendations increase, short interest declines, and accounting fundamentals improve. Most importantly, ownership by long-term (“dedicated”) institutional investors increases. All five types of evidence agree that activist interventions increase long-term shareholder value.
Keywords: Shareholder Activism, Activist Investors, Analyst Recommendations, Short Selling, FScore
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