Activist investors and Corporate Governance

Activist Investors engagement has been constant over recent years. Despite much being left to be discussed about the issue, this post aims at recommending a couple of articles focusing on the medium to long-term impact of Activist Investor action on companies, shareholders and stakeholders. My point of view is that the positive contribution of these articles, both authored by prestigious researchers and universities, is their different perspectives. On the one hand, Coffee Jr.-Palia proposes a mixed assessment of Activist Investors’ effects in his 2015 article, entitled “The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance”:

“Although some view this trend optimistically as a means for bridging the separation of ownership and control, we review the evidence and find it far more mixed. In particular, engagements by activist hedge funds appear to be producing a significant externality: severe cut-backs in long-term investment (and particularly a reduction in investment in research and development) by both the targeted firms and other firms not targeted but still deterred from making such investments.”

On the other hand, Bebchuk-Brav-Jiang’s 2015 article “The Long-Term Effects of Hedge Fund Activism” affirms:

“We find 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. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns.”

The fact is that Activist Investors activity has been widely debated by the public opinion for the negative effects it could have on the long-term interests of the companies they target.

Be it accurate or not, it may indeed be necessary that they provide better explanations to shareholders and the public. It is probable that this might have been the reason for the Council for Investor Rights and Corporate Accountability’s lobby created at http://www.investorrights.org/, with interesting Activist Investors related articles. According to its Mission Statement: “CIRCA’s mission is to get out the facts about activist investing and the role activist investors play in our economy. Activist investors directly benefit all public shareholders, including the investment vehicles for all of the country’s stock based savings vehicles, such as mutual funds and public and private pension funds.”

We already have, thus, literature for the weekend.

Hoping this contribution is of interest to all.