The number of campaigns by activist shareholders, such as Carl Icahn, has risen dramatically in recent years, and with it the debate over the value of shareholder activism for the targeted companies. Activists champion themselves as important corporate governance players who advise, monitor and discipline managers and boards, encouraging them to make decisions that serve shareholders’ best interests. Critics of activism contend that activists pressure managers and boards to make decisions that may provide short-term benefits but ultimately hurt long-term value. This debate has gained increased prominence as the US Congress considers legislation, the Brokaw Act, whose objective is to “strengthen oversight” of shareholder activists.
Our study, Are Activist Investors Good or Bad for Business? Evidence from Capital Market Prices, Informed Traders, and Firm Fundamentals investigates the long-term value of shareholder activism using a large sample of activism campaigns announced from 1994 to 2014 (over 4000 in some analyses). The study, which is available here, examines five different types of evidence: stock market reactions, analyst recommendations, short sales, financial statement fundamentals, and institutional ownership.
We find that companies targeted by activists experience sizable, risk-adjusted returns of approximately 4.5% when the activist’s ownership becomes public information via an SEC filing. Most of this return occurs during the week before and the week after the announcement. Consistent with prior studies, returns are highest (17%, on average) for campaigns that seek to put the company or a part of it up for sale. For non-sale campaigns, the corresponding two-week return is still sizable at approximately 3.5%, with the return varying by the objective of the activist. We find no evidence that these positive returns reverse—in fact, they increase significantly—over a longer, post-announcement horizon of two years. Interested readers can find a detailed breakdown of returns by activist objective on Tables 2 and 3 of the study.
Critics of activist shareholders are generally skeptical about relying on market reactions to assess whether activist demands add or detract from the long-term value of the companies targeted. The study therefore also examines how market participants who invest heavily in information react.
First, we compare levels of short interest and analyst recommendations for firms targeted by activists to those of non-targeted firms with similar characteristics. Prior literature indicates that, in a variety of settings, short sellers and analysts are sophisticated market participants who are informed about companies’ future prospects. We find that analyst recommendations decline and short interest increases at target firms in the year leading up to an activist campaign. Starting in the announcement month, the trends reverse: short selling declines rapidly and analyst recommendations become more favorable. These favorable changes are not observed for control firms.
We also examine accounting results using a summary measure that combines nine financial statement fundamentals to create a broad, composite measure of financial health. We find that both activist targets and control firms experience declines in fundamentals before the activist campaign. Financial statement fundamentals for target firms then improve to the extent that the targets have statistically higher fundamentals after two years.
Our final set of analyses examine changes in stock ownership by short-term (“transient”) and long-term (“dedicated”) institutional investors. If, as critics contend, activism causes managers to adopt policies that favor short-term results at the expense of long-term value creation, institutional investors with a long-term investment horizon would be expected to decrease their ownership, while those with a short-term horizon would increase their position. We find the opposite. Starting in the quarter of the activist intervention, ownership by transient institutional investors begins to decline steadily, whereas ownership by dedicated institutional investors increases.
In summary, our study considers several types of evidence to shed light on the value of shareholder activism. The results all point to the same conclusion—that activist campaigns add value to the targeted companies. This finding should be of interest to boards and managers as they engage with activist shareholders who push for changes, and to regulators and legislators who are considering actions that may reduce incentives for activists to intervene at under-performing companies.