Activist Investors Cause Headaches for Boards, Boost Value for Stockholders


As the latest headlines from Dell and Apple remind us, activist investors are the Kardashians of the business world. Love them or hate them, everyone’s got an opinion on them.

If you’re on the board of directors of a public company, you might consider them a worm in your Apple — which the investment firm Greenlight Capital is pressing to pay shareholders some of its $137 billion hoard of cash. Or maybe you view them as a distraction like at Dell, which Southeastern Asset Management is suing to raise the price of a leveraged buyout.

If you’re a stockholder, on the other hand, you might welcome such corporate gadflies. Not only might they tip the balance of power your way, but they might raise your stock returns. That’s the finding of Jonathan Cohn, assistant professor of finance at the McCombs School of Business.

In a recent paper with professors Jay Hartzell of McCombs and Stuart Gillan of the University of Georgia, Cohn looked at activist investors and how their presence affects a company’s stock price. 

“We were trying to see, from the big-picture standpoint, how these activist investors create value for shareholders,” he says. “Our underlying objective was to see whether shareholders benefit from giving shareholders more direct control over a company.”

To measure the impact of activists, the researchers looked at Wall Street’s response to a 2010 rule from the Securities and Exchange Commission. The rule would make it easier for activist stockholders to replace corporate directors by running their own candidates. When companies sent out proxy ballots for board elections, they would have to include the challengers — instead of forcing challengers to send out separate ballots.

“With this rule in place,” explains Cohn, “activists would find it less expensive to run those campaigns. Shareholders may also take an activist’s nominees more seriously if they are on the company’s ballot than if they are on a completely separate ballot provided by the activist.”

The results, he theorized, should show up in stock returns: Companies with activist investors should enjoy higher returns than those without.

To identify companies with activist investors, the researchers started with a database of activists called the SharkWatch50. They picked 41 institutional investors and the 5,437 companies in which they held stock. At those firms, the 41 activists accounted for three-quarters of all proxy contests since 1999.

Next, the researchers tracked the ups and downs of the companies’ stocks, as the proposed rule went through a series of changes. They found a consistent pattern: When the rule changes favored activist stockholders, the companies enjoyed higher average returns than the overall market. When the changes set higher hurdles for the activists, the companies suffered lower returns.

Their differences from the overall market ran from 0.43 to 1.3 percent. Those gaps might sound small, observes Cohn, but statistically, their likelihood of happening by chance was less than 1 percent.

The results, he says, suggest that the mere presence of an activist investor can affect a company, even when the investor is not making noise. “We see fireworks when a Carl Icahn or a Kirk Kerkorian comes in and agitates for seats on the board. But the vast majority of this activism takes place behind the scenes. An activist investor writes a letter to the CEO and says, ‘I think this company should change course, sell off assets or downsize.’ If it doesn’t turn into a full-blown proxy contest, we, as observers, may not see it.”

Public companies can expect more such investors, he adds. SharkWatch reports that activist campaigns were up 31 percent in 2012, even though courts overturned the SEC rule on proxy ballots.

That’s partly because other institutional investors are increasingly backing activists. In Dell’s case, two major investors support Southeastern’s crusade to pay stockholders more for buying them out. “What we are witnessing now,” says Cohn, “is simply a very public negotiation between shareholders and [CEO Michael] Dell’s group over the price.”

Though corporate directors may grumble, stockholders can rejoice, concludes Cohn. “The balance of power is tilting more towards shareholders, and it has progressively over the last five to ten years. At least on average, this looks like a world in which more direct shareholder control would be a good thing.”

Watch an animated explanation of the origin of activist shareholders in the newest installment of Texas Enterprise’s Lingo video series, narrated by McCombs Assistant Professor Dain Donelson.

Posted: March 2, 2013


Faculty in this Article

Jonathan Cohn

Associate Professor of Finance McCombs School of Business

Jonathan Cohn received his Ph.D. in finance from the University of Michigan. His research interests include corporate governance, mutual...

About The Author

Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

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