We examine the long-term effects of interventions by activist hedge funds. Research documents positive equal-weighted long-term returns and operating performance improvements following activist interventions, and typically conclude that activism is beneficial. We extend the literature in two ways. First, we find that equal-weighted long-term returns are driven by the smallest 20% of firms, with an average market value of $22 million. The larger 80% of firms experience insignificant negative long-term returns. On a value-weighted basis, which likely best gauges the effects on shareholder wealth and the economy, we find that pre- to post-activism long-term returns insignificantly differ from zero. For operating performance, we find that prior results are a manifestation of abnormal trends in pre-activism performance. Using an appropriately matched sample, we find no evidence of abnormal post-activism performance improvements. Overall, our results do not strongly support the hypothesis that activist interventions drive long-term benefits for the typical shareholder, nor do we find evidence of shareholder harm.
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Market value data are calculated annually for the CRSP universe, averaged over our sample period.
We do not assert that equal-weighted returns are irrelvant but rather that the choice between equal- and value-weighted returns depends on the researcher’s objective. For example, in a study of returns to equity issuances, Brav et al. (2000) note: “If we are interested in the managerial implications [of an event], equal weighting returns might be more appropriate. If the researcher’s goal, however, is to quantify investors’ average wealth change subsequent to an event, then it follows that value weighting is the correct method” (p. 212).
A similar sentiment is expressed by Delaware Supreme Court Chief Justice Leo Strine in a monograph on the pros and cons of hedge fund activism: “Unless we consider the economic realities of ordinary human investors … we are not focused on what is most important in assesing the public policies shaping our corporate governance system” (Strine 2017, p. 1871). Strine (2017) also notes that activism also has a significant impact on the employees of target firms. The fact that larger firms employ the vast majority of workers is another reason for focusing on value-weighted long-term consequences.
Long-term returns are difficult to precisely estimate and test. Despite these difficulties, we do identify significant long-term returns on an equal-weighted basis in the pooled sample, and tests partitioning on market value find statistically significant long-term returns in the smallest 20% of firms. Further, the larger 80% of firms experience a negative equal-weighted average return, which is inconsistent with value creation.
Barber and Lyon (1996) and Holthausen and Larcker (1996) illustrate the difficulty in developing valid benchmarks for assessing changes in operating performance, especially for settings where large changes occur in operating performance prior to some event. Additional analyses discussed in section 4.2 expand our analyses to control for differences in other covariates, including market value, book-to-market, leverage, cash holdings, payout, analyst following, sales growth, and firm complexity.
Studies find mixed evidence on whether hedge fund activists successfully prompt governance or operational changes, and whether post-intervention changes are linked to long-term value creation or destruction is similarly unclear (Denes et al. 2016). For example, see the mixed results of Brav et al. (2008), Brav et al. (2010), Boyson and Mooradian (2011), and Klein and Zur (2009).
This interpretation resembles that of Loughran and Vijh (1997), which notes that studies of aggregate long-term wealth gains to shareholders, following acquisitions, should examine returns accumulated over the combined event and post-event period.
Brav et al. (2015) do a robustness test matching on the pre-activism trend in performance, but whether the paper’s other analyses would survive matching on the pre-activism trend in performance is unclear. Further, the matched-analyses robustness test pools both surviving and acquired firms, so whether operating improvements exist for surviving firms alone is unclear.
We rely on the Equilar data when possible, because Equilar provides broader coverage than ExecuComp. We do not use ExecuComp for director information, because its director coverage only begins in 2006. Because Equilar data are only available starting in 2001, we use ExecuComp as the source of CEO data prior to 2001 and Equilar after 2001.
Because some of the targets are not covered in either the ExecuComp or Equilar databases, the sample size to calculate the median board turnover percentage is less than the maximum sample size of 1964.
Because many targets are very small firms, we make one addititional adjustment from Daniel et al. (1997). Specifically, we do not require the portfolio firms to have two years of Compustat data prior to portoflio formation.
Throughout this paper, “similar” results mean significant test coefficients remain significant at 10% and insignificant test coefficients remain insignificant.
As discussed in section 2.2, matching procedures that do not include any measure of pre-event performance are misspecified. Thus, for brevity, we do not investigate results using matching procedures from past papers that do not include any measure of performance, such as those matching on size and BTM.
Observing no improvement in within-firm ΔROA for the activist targets reduces concerns that activist interventions improve ROA for both target and control firms (e.g., due to spillover effects), in which case, comparing ΔROA for target firms to ΔROA for control firms mitigates the effects we are investigating.
Some tests of Brav et al. (2008) and Bebchuk et al. (2015) find a positive but insignificant change in operating performance in the first year or two after the activist intervention, whereas we find a positive and significant change in all years. This difference may arise from differences in sample size, because the aforementioned papers have sample periods ending in 2007.
The fact that we cannot find adequate matches for 288 target firms highlights the unusual nature of firms that are subject to activist interventions, and indicates the matched samples used in prior studies are potentially unlikely to have covariate balance. In untabulated analysis, the 288 firms that could not be matched tended to be smaller, with mean assets of $489 million, and more extreme values of ROA, with an average value of −0.052. Dropping these firms explains why the target firms’ mean ROA increases from 0.045 in Table 4 to 0.071 in Table 5.
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We thank Ian Gow, Jon Karpoff, and Eric So for helpful advice and Alon Brav for kindly sharing data on hedge fund activism. We gratefully acknowledge the support of the Stanford Rock Center for Corporate Governance, the Centers & Initiatives for Research, Curriculum and Learning Experiences (CIRCLE), the University of Washington’s Foster School of Business, the FMC Faculty Research Fund, and the University of Chicago’s Booth School of Business.
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deHaan, E., Larcker, D. & McClure, C. Long-term economic consequences of hedge fund activist interventions. Rev Account Stud 24, 536–569 (2019). https://doi.org/10.1007/s11142-019-9480-8
- Hedge fund activists
- Long-term economic value of activism