The evidence is supposedly in. Although it’s not at all surprising, it is nice to have empirical proof to back up the fact that the activities of so-called “activists” such as Carl Icahn, Bill Ackman, and Dan Loeb ultimately only benefit shareholders, not workers, at the firms they target.

The new study was undertaken by academics from Duke, Cornell and Columbia Universities, and provides unambiguous proof that firms following activist intervention do see increased productivity, which translates to higher earnings/higher share price, but workers experience stagnation in work hours and wages despite the increase in labor productivity.

In their paper, authors Alon Brav, Wei Jiang and Hyunseob Kim studied the long-term effect of hedge fund activism on firm productivity based on plant-level data from the U.S. Census Bureau.

Firms targeted by activists have higher stock prices three years later

activism-job Activists

The authors highlight the notable body of literature that demonstrates the stock prices of target firms experience significant positive returns when the market first learns of the presence of shareholder activists. Some of this literature also documents a clear improvement in operating performance of firms years after hedge fund interventions.

Based on a sample of almost 2,000 activism events in the United States from 1994 to 2007, Brav, Jiang and Kim validated prior results using return on assets (ROA) as the performance measure. Figure 1 shows the target firms’ average ROA relative to a control group of firms with similar size and age in the same  industry and year, from 3 years before to 3 years following the public announcement of activism. You can see a clear “V” shaped pattern centered on the year of intervention by activists in the figure, which in the third year after the intervention is significantly higher than during the year of intervention or the year before intervention.


Workers do not benefit post-activism

The survey undertaken by Brav, Jiang and Kim also highlights that although productivity improves significantly following intervention by activists, the changes in work hours and wages are “insignificant” after the intervention. The authors also note the general increase in labor productivity only significant in highly unionized industries.

They point out that investors, not workers, see all of the benefits of activism: “The improvement in labor productivity coupled with relatively stable wages indicates that workers do not fully capture the value of productivity improvements but instead relinquish most of the surplus to equity investors after hedge fund intervention.”

The full study can be found above or here – Rev. Financ. Stud.-2015-Brav-2723-69