The Long-Term Effects of Hedge Fund Activism
We test the empirical validity of a claim that has been playing a central role in debates on corporate governance—the claim that interventions by activist hedge funds have a negative effect on the long-term shareholder value and corporate performance. We 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.
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. Our findings have significant implications for ongoing policy debates.
We wish to thank Kobi Kastiel, Bryan Oh, Heqing Zhu, and especially Danqing Mei for their invaluable research assistance. We also benefitted from conversations with and comments from Yakov Amihud, Allen Ferrell, Jesse Fried, Robert Jackson, Louis Kaplow, Mark Roe, Steven Shavell, Andrew Weiss, and workshop and conference participants at Harvard, Columbia, the Harvard Roundtable on Hedge Fund Activism, the Federalist Society Convention, and the Annual IBA International M&A Conference. We received financial support from Harvard Law School, Duke University Fuqua School of Business and Columbia Business School. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.