From Apple (NASDAQ:AAPL) to J.C. Penney (NYSE:JCP), activist hedge funds have been in the news recently. Activists purchase minority blocks in target companies and are able to intervene in various firm policies. Critics say that intervention hurts companies in the long run and that activist hedge funds are only out for short-term profits. A recent paper from Duke University’s Fuqua School of Business’s Alon Brav, Harvard Law School’s Lucian Bebchuk, and Columbia Business School’s Wei Jiang proves the critics wrong. The study, “The Long-Term Effects of Hedge Fund Activism“, shows companies’ performance improves, on average, subsequent to activists’ involvement. (read the full paper about activist hedge funds here).
Finance professor Alon Brav explains the findings in a Fuqua Q and A.
1. What would you consider the most significant finding of this study?
We use a dataset consisting of approximately 2,000 interventions in the U.S. by activist hedge funds over the period 1994-2007. We identify for each event the month in which the activist initiative was first publicly disclosed (usually through the filing of a Schedule 13D to the SEC). Using the data on operating performance and stock returns of public companies during the period 1991-2012, we track the operating performance and stock returns for companies during a long period — five years — following the month of the intervention.
We also examine the three-year period that precedes activist interventions and that follows activists’ departure. We find that the operating performance improves following activist interventions and there is no evidence that the improved performance comes at the expense of performance later on. In addition, we find significant positive (roughly 6 percent) stock price reaction around the period in which activist interventions are disclosed to the public. This short-term market reaction to the entry of activists does not reflect an inefficient market reaction since we do not find any subsequent negative price drift in the ensuing few years post-activism.