A recent paper finds no evidence to support the claim that interventions by activist hedge funds have a negative effect on the long-term shareholder value and corporate performance.
In a paper published by the U.S. National Bureau of Economic Research (NBER), authors Lucian Bebchuk, Alon Brav, and Wei Jiang “subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data.”
The paper focuses on 2,000 interventions by activist hedge funds between 1994 and 2007, and finds “no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance.”
There is also no evidence that the initial positive stock-price spike that follows an activist intervention tends to be followed by negative abnormal returns in the long term, the authors say.
“To the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences,” the authors say. In addition, there is no evidence that the exit of an activist investor is followed by abnormal long-term negative returns.
“Our findings have significant implications for ongoing policy debates,” the authors suggest.
“Policymakers and institutional investors should not accept the validity of the assertions that activist interventions are costly to firms and their shareholders in the long term,” the authors say “such claims do not provide a valid basis for limiting the rights, powers, and involvement of shareholders.”
The paper, “Long-Term Effects of Hedge Fund Activism” is due to be published in the Columbia Law Review.