The public debate about hedge-fund activism has long been informed by academic literature that found increases in shareholder value and operating performance after activist interventions. But do hedge-fund activists actually do any long-term good for the companies that they target? Long-Term Economic Consequences of Hedge Fund Activist Interventions, from the Rock Center for Corporate Governance, examines just that question. The answer? Not so much. But not so much harm either.
Proponents of hedge-fund activism contend that activists provide necessary financial discipline, leading to improved performance. Opponents contend that hedge-fund activists impose a short-term view, impairing the company, its employees and perhaps also its community. (See this PubCo post, this PubCo post and this Cooley News Brief.) To examine these contentions, the authors looked at a sample of 1,964 activist targets from 1994 to 2011, measuring the short-term (the 21-day window surrounding the activist intervention) and long-term (from one month before the intervention through the one and two years thereafter) impact of hedge-fund activist interventions.
The authors found that, consistent with other studies, both short-term and long-term returns that were equal-weighted were significantly positive—5.4% for short-term returns and 6.8% for one-year and 5.9% for two-year returns. However, that picture grew more refined when the returns were examined across size distribution. Taking size into account, the authors showed that these positive returns were primarily driven by the smallest 20% of targets with an average market cap of just $22 million. For the larger 80% of targets, the short-term returns were still significantly positive at 4.4%, but long-term returns revealed “an insignificantly negative two-year return of -1.6%,… providing some indication that the initially positive returns are temporary.”
Moreover, the authors maintain, “for policy-oriented research evaluating the impact of hedge fund activism on shareholder wealth and the economy, a focus on value-weighted pre-to-post activism long-term stock returns is worthwhile.” In the study, when returns were value-weighted by size, short-term returns were still significantly positive, but shrunk to only 2.4%, and the long-term returns were “insignificantly different from zero”; importantly, fewer than half of all activist targets experienced positive long-term returns, and the average impact on shareholder wealth was “insignificant.”
Of the targets studied, 1,455 survived as public companies for at least two years following the intervention, while the remaining 26% delisted. The delisted group of companies comprised 19% that delisted because they were acquired (with significant positive long-term returns) and 7% that delisted for other reasons (with significant negative returns). For the continuing 1,455 companies, the study examined the impact of hedge-fund activism on long-term operating performance. A number of prior studies have shown a positive impact. However, using an “appropriately matched sample,” that is, one that also takes into account “pre-activism performance trends,” the authors found “no evidence of improvements in multiple measures of operating efficiency following activist interventions.“
The authors also examined whether the target companies changed their investment behaviors after activist interventions, including investment in R&D, advertising and capital expenditures. The results were generally mixed: the study found no evidence of “consistent trends” in these types of investments in the years following hedge fund activist interventions. Moreover, the study found insignificant value-weighted mean returns for companies that engaged in high levels of asset sales or that appointed a new CEO, while companies with significant board turnover had mostly neutral returns. Overall, the authors indicated, they found “little evidence that commonly discussed strategy and governance motivations for activist interventions have consistent associations with improvements in shareholder wealth.” Notably, although the authors found no evidence that activist interventions destroy value, they also concluded that “nearly all the positive long-term returns to activist interventions are concentrated in firms that are subsequently acquired”; moreover, among “surviving but nonacquired firms, small surviving firms experience positive returns, whereas larger firms end up neutral or worse off.