Negative Activism

Abstract

Shareholder activism has become one of the most important and widely studied topics in law and finance. To date, popular and academic accounts have focused on what we call “positive activism,” where activists seek to profit from positive changes in the share prices of targeted firms. In this Article, we undertake the first comprehensive study of positive activism’s mirror image, which we term “negative activism.” Whereas positive activists focus on increasing share prices, negative activists take short positions to profit from decreasing share prices.

We develop a descriptive typology of three categories of negative activism and use a private database of activist activity and other hand-collected information to provide empirical evidence about the frequency and manner with which each category occurs. First, informational negative activism seeks to uncover and then communicate the truth about companies whose shares the activists believe are overvalued. We show that the announcement of this kind of activism is associated with a statistically significant abnormal decline in share prices. Second, operational negative activism involves dismantling or disabling sources of value at companies. We document a range of actual and potential instances of operational negative activism and associated abnormal share price declines. Third, unintentional negative activists are failed positive activists: their announcements of ownership stakes in companies they target are met with immediate negative abnormal returns.

Using this typology and the related evidence, we explore the policy and regulatory implications for each category of negative activism. We show a range of areas where policy and regulatory goals either conflict with or seemingly ignore the effects from negative activism. We also offer several ways that existing regulatory approaches could be improved to account for negative activism. In general, we advocate less regulation, and even subsidization, of informational negative activism; tighter regulation of operational negative activism; and a more nuanced approach to unintentional negative activism.