This paper focuses on a claim that has been playing a central role in debates over shareholder activism and corporate governance. According to this “myopic activists” claim, activist shareholders with short investment horizon, especially activist hedge funds, push for actions that are profitable in the short term but are detrimental to the long term interests of companies and their long-term shareholders. The problem, it is claimed, results from the failure of short-term market prices to reflect the long term costs of actions sought by short-term activists. As a result, activists seeking a short term spike in a company’s stock price have an incentive to seek actions that would increase short-term prices at the expense of long-term performance, such as cutting excessively investments in long-term projects or the reserve funds available for such investments.
In this paper, we conduct a systematic empirical investigation of the myopic activists claim, focusing on interventions by activist hedge funds. Such funds have been playing an increasingly central role in the corporate governance landscape in general and shareholder activism in particular. We find that the myopic activists claim is not supported by the data. Our findings have important policy implications for ongoing policy debates on corporate governance and the rights and role of shareholders.
The myopic activists claim has far been put forward by a wide range of prominent writers. Such concerns have been expressed by significant legal academics, noted economists and business school professors, prominent business columnists, important business organizations,5 and top corporate lawyers.
Furthermore, those claims have been successful in influencing important public officials and policy makers. For example, Chancellor Leo Strine and Justice Jack Jacobs, two prominent Delaware judges, have expressed strong concerns about short-sighted activism.7 When serving as SEC chairman, William Donaldson expressed concerns about such activism.8 And concerns about intervention by activists with short horizons persuaded the SEC to limit use of the proxy rule adopted in 2010 to shareholders that have held their shares for more than three years.
The policy stakes are substantial. Invoking the long-term costs of activism has become a standard move in arguments for limiting the role, rights, and involvement of shareholder activists. In particular, such arguments have been used to support, for example, takeover defenses, impediments to shareholders’ ability to replace directors, limitations on the rights of shareholders with short holding periods.
As one of us analyzes in detail in other work, the claim that activist interventions are detrimental to the long-term interests of shareholders and companies cannot be derived from theory even assuming the existence of inefficient capital markets and short activist horizons. The claim is a factual proposition that can be empirically tested. However, those advancing the myopic activists claim have thus far failed to back their claims with any large sample empirical evidence. Some supporters of the claim seem to assume the validity of their claim, failing to acknowledge the empirically contestable nature of their claim and the need for evidence, while other supporters of the claim have offered their experience as evidence.
At the same time, financial economists have produced significant empirical work on hedge fund activism. There is evidence that the filing of 13D schedules – public disclosures of the purchase of a significant stake by an activist – are accompanied by significant positive stock price reactions as well as subsequent improvements in operating performance. However, supporters of the myopic activist claims dismiss this evidence, taking the view that losses to shareholders and companies from activist interventions take place later on.
On their view, improved performance following activist interventions comes at the expense of sacrificing performance later on, and short-term positive stock reactions merely reflect inefficient market prices that are moved by the short-term changes and fail to reflect their long-term costs. Thus, one prominent supporter of the myopic activism claim has recently argued that the important question is“[f]or companies that are the subject of hedge fund activism and remain independent, what 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.”
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