Hedge Fund Activism: Good or Bad?
Lucian Bebchuk, at Harvard, is one of the most important, and interesting, thinkers in corporate governance and economics. He recently published research on the effects of hedge fund activism, along with Wei Jian at Columbia and Alon Brav at Duke.
This paper, The Long-Term Effects of Hedge Fund Activism (free download), provides an analysis of almost 2,000 hedge fund interventions from 2004-2007 and looks at how these interventions impacted the companies. Here is what they found (taken from his Wall Street Journal op-ed announcement):
- During the five-year period following activist interventions, operating performance relative to peers improves consistently through the end of the period
- The initial stock price spike following the arrival of activists is not reversed in the long term, as opponents assert, and does not fail to reflect the long-term consequences of activism
- The long-term effects of hedge fund activism are positive even when one focuses on the types of activism that 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
- The “pump-and-dump” claim that activists bail out before negative stock returns arrive is not supported by the data
- Contrary to opponents’ beliefs, companies targeted by activists in the years preceding the financial crisis were not made more vulnerable to the subsequent downturn
That all sounds pretty good to me.
Now, all of that said, we need to be careful to understand what this research did and DID NOT study.
For example, we don’t know much about the non-financial performance of these organizations. For example, did employee churn go up or down? Did customer satisfaction go up or down? Did litigation expense go up or down?
Some of these indicators may not impact financials within the window of analysis.
Now, all of THAT said, their research and evidence supports the notion that hedge fund activism will increase rather than decrease a firm’s financial performance.
Good to know!
To learn more about how to improve more than financial performance in your organization, take a look at OCEG’s GRC Capability Model (Red Book).
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