THE WALL STREET
OPINION | August 6,
2013, 7:00 p.m. ET
The Myth of Hedge
Funds as 'Myopic Activists'
A new study of 2,000
interventions finds they create long-term value.
By LUCIAN BEBCHUK
The recent increase in
hedge-fund activism aimed at producing changes in business strategy or
leadership—including at large companies such as Apple, Hess,
Procter & Gamble and, as announced last week, Air Products—has met
intense opposition from public companies and their advisers.
Opponents, such as prominent corporate adviser Martin Lipton, argue
that such activism is detrimental to the long-term interests of
companies and their shareholders: It may pump up short-term stock
prices and benefit the activists—who don't stick around to eat their
own cooking—but it harms shareholders in the long term.
This "myopic activism"
claim has become the key argument for limiting the rights and
involvement of public company shareholders. Furthermore, this claim
has been successful in influencing the views of Securities and
Exchange Commission officials, Delaware judges, and even institutional
But is the claim true? In a
comprehensive empirical study, "The Long-Term Effects of Hedge Fund
Activism," completed last month and available on the Social Science
Research Network, Duke University's Alon Brav, Columbia University's
Wei Jiang and I found that it is not.
The claim that activist
interventions by hedge funds are followed in the long term by declines
in operating performance and shareholder wealth is, fundamentally, an
empirical proposition that can be tested using data about companies'
financial performance. While opponents of activism have been making
this claim with confidence and passion, they have failed to analyze
the data and to back up their rhetoric with evidence.
indicating the arrival of hedge-fund activists are commonly
accompanied by stock-price increases. Opponents of activism view these
stock price spikes as merely reflecting inefficient market pricing in
the short term. Mr. Lipton, for example, has argued that what is most
important for companies subject to hedge-fund activism is "the impact
on their operational performance and stock price performance relative
to the benchmark, not just in the short period after announcement of
the activist interest, but after a 24-month period."
Meeting this challenge, we
undertook a comprehensive empirical investigation of the long-term
consequences of activist interventions. Our study uses a data set
consisting of the full universe of approximately 2,000 interventions
by activist hedge funds from 1994–2007. We identify for each activist
effort the "intervention month" in which the activist initiative was
first publicly disclosed, and we follow the company for the subsequent
The evidence indicates that
activist interventions tend to target underperforming companies, not
well-performing ones. During the three years preceding the
intervention month, the operating performance of companies targeted by
hedge fund activists significantly trails industry peers, and the
companies' stock returns are abnormally negative. This slide tends to
reverse following activists' interventions.
During the five-year period
following the intervention month, operating performance relative to
peers improves consistently. On average, the companies targeted by
activists close two-thirds of their gap with peers in terms of
return-on-assets and two-fifths of this gap in terms of "Tobin's q," a
standard measure of how effectively companies turn book value into
We also examined whether,
as opponents claim, the initial stock-price spike accompanying
interventions, which we find to be approximately 6%, is reversed in
the long term. The data show no such reversal. Contrary to the belief
that the market fails to appreciate the long-term consequences of
activism, long-term shareholders don't suffer any negative abnormal
returns during the subsequent five-year period.
To investigate the
"pump-and-dump" claim that activists bail out before negative stock
returns arrive, we examined the three-year period following an
activist's cashing out its stake to below the 5% disclosure threshold.
We found that remaining shareholders don't experience any negative
abnormal stock returns during this period.
Two types of activist
interventions are most resisted and criticized—first, those that lower
or constrain long-term investments by enhancing leverage, beefing up
shareholder payouts, or reducing capital expenditures; and second,
adversarial interventions employing hostile tactics. When limiting the
analysis to each of these sets of interventions, we find that none of
them validates opponents' concerns: In both samples, interventions are
followed by significant improvements in operating performance through
the end of the subsequent five-year period.
Finally, we examined claims
that activist interventions during the years preceding the 2008
financial crisis made the targeted companies more vulnerable to the
subsequent downturn. We found, however, that these companies fared as
well as peer companies during the crisis years.
Our findings indicate that
policy makers and institutional investors should not accept assertions
that activist interventions are detrimental in the long term. Such
claims should be rejected as a basis for limiting the rights and
powers of public-company shareholders.
Mr. Bebchuk is a
professor of law, economics and finance at Harvard Law School and
director of its corporate governance program.
A version of this
article appeared August 7, 2013, on page A13 in the U.S. edition of
The Wall Street Journal, with the headline: The Myth of Hedge Funds as
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