Are Activist Investors Good or Bad for Business? Evidence from Capital Market Prices, Informed Traders, and Firm Fundamentals

• In Event: Fundamental Analysis and Valuation

Abstract

For an expanded set of activist investors that includes non-hedge fund activists, we examine five different types of evidence to determine whether interventions by activist investors increase shareholder value. We find that short-window returns around the announcement of an activist share purchase are sizable and are higher for non-hedge fund activists than hedge funds; further, the returns do not reverse in a two-year, post-intervention period. Many critics of activism maintain the market is being misled. We therefore investigate how market participants who invest heavily in information respond. Despite the price increase around the activist announcement, analyst buy recommendations increase, short interest declines, ownership by long-term (“dedicated”) institutions increases, and accounting fundamentals improve. These post-announcement changes are somewhat greater for hedge-fund than non-hedge-fund targets. Our study provides new evidence that activist interventions increase long-term shareholder value.

Authors

• Edward P Swanson, Texas A&M University

• Glen Young, McCoy College of Business Administration, Texas State University