Are All Activists Created Equal? The Effect of Interventions by Hedge Funds and Other Private Activists on Long-term Shareholder Value

Numerous influential critics and corporate managers allege that activist investors demand changes that increase short-term stock prices at the expense of long-term shareholder value (“short-termism”). Research to-date focuses on hedge funds. We provide new evidence by using a larger sample over a 20-year period that includes both hedge funds and other private (non-hedge fund) activists, and we supplement market returns with the reactions of analysts and institutional investors. We find that abnormal returns are positive and economically significant around ownership announcements for both hedge funds and other private activists. The announcement return is somewhat larger for other private activists, however. This is due to their frequent demands for a sale of all, or part, of the firm and the high returns they earn on this type of demand. Over a two-year, post-intervention period, the return differential increases for sale demands and becomes significant for two non-sale demands (Board composition, engage management). Despite sizable short- and long-window stock price increases, equity in companies targeted by activists does not appear to be overvalued: analysts' recommendations become more favorable – a reversal of the pre-announcement trend – and long-term, “dedicated” institutional investors increase their ownership. Our study provides new evidence that is hard for critics to dismiss showing that interventions by activists increase long-term shareholder value