It understates the situation to simply state the pace of shareholder activism has increased recently. What we are witnessing is “activism on steroids,” says a new academic white paper that considers the impact of activist investors on publicly traded stocks. The study considers the negative impacts on research and development and shortening the corporate investment time horizon.
While the impact on the stock price in the short term is clear (stock prices tend to move higher), the longer term impact is mixed, say Columbia University School of Law Professors John Coffee and Darius Palia of Rutgers Faculty. In their white paper, “The Impact of Hedge Fund Activism: Evidence and Implications,” the report authors say the evidence that activism improves a company’s operating performance is “particularly thin” and that this shouldn’t surprise people.
The key to understanding the impact of activist investors in this study is the short holding period assigned to activists. The median length of time an activist hedge fund held a stock in the study was just nine months.
The study doesn’t limit analysis based only on shareholder returns as a measure, which the authors say is “imposing blinders” on results. “Much of those gains may be wealth transfers from bondholders and employees, and much of the balance may derive from temporary increases in the target’s expected takeover premium,” the study concluded.
Activism shortens corporate investment time horizons
The report took a wider view of the impact of activism on society and said it shortens corporate investment time horizons and in particular noted how activism endangers research and development needed to benefit society.
The report highlighted the Allergan, Inc. (NYSE:AGN) / Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) battle, which is an example of a firm with a strong research department that could be slashed if acquirer Valeant is consistent in its roll-up management practices. But the report authors also note a financial point. “The Allergan battle highlights this danger, and even the studies most favorable to hedge fund activism find that these interventions regularly increase leverage and reduce investment in R&D and long-term capital expenditures.”
This work contrasts another academic report covered in ValueWalk, “The Long Term Effects Of Hedge Fund Activism,” which concluded positive impact of activism over the long term.
Also interesting to note is the differences in attributed performance in this Columbia University study and the performance attribution of the largest and most successful activist hedge fund managers, which, as previously reported in ValueWalk, has outperformed.
What wasn’t addressed in the study was how different groups of activists conducted business. If researchers had broken down activist hedge funds into the most successful based on two year average returns, and then studied the behavior of this data set, the results of the study would have been very different. With the growth in popularity of activist investing, the talent pool has diluted and considering sub groups away from the strategy mean – by looking at tactics, holding periods, selection methods and how they work with corporate management and the board of directors – might provide a very different look.
To read the full white paper click here.