Generally it works, and sometimes it works really, really well.

Investors often wonder whether activist investing truly delivers “alpha” – returns above a relevant index. Is it worth the time, energy, money, and heartburn?

Until recently the scant evidence on activist investing showed at best mixed results. Various scholars studied the corporate raiders and LBOs of the 1980s and 1990s, with conclusions ranging from value-destroying to value-enhancing. Anecdotes and accounts of individual successes and failures abound. Activist investors as we know and define them have labored at the craft since at least the early- to mid-1990s, so how about a rigorous study or two, with a large sample and proper analysis?

Well, now we have a few better instances with which to work. If you want to skip right to the homework assignment, see the end of the post. You can link to all of the papers cited, as well.

Initial efforts to improve this research centered on evaluating the impact of better corporate governance on equity returns:

1. •Gompers, Ishii, and Metrick wrote the seminal paper on this subject, in which they identify and analyze 24 different corporate governance factors, way back in 2003.
   

2. •Lucian Bebchuk, the Harvard Law professor with an extensive CV in activism, last year refined (with co-authors Cohen and Ferrell) the list to identify the six best factors.
   

Both conclude that corporate governance does affect equity returns materially. Yet, a recent working paper by Fodor and Diavatopoulos questions this result as specific to the sample of companies and time period used.

More recent research has examined the impact of activist investors, specifically hedge funds, on equity returns. An initial effort along these lines came from Gillan and Starks in 2007, which summarized a number of smaller studies that preceded them:

1. The evidence provided by empirical studies of the effects of shareholder activism is mixed. While some studies have found positive short-term market reactions to announcements of certain kinds of activism, there is little evidence of improvement in the long-term operating or stock-market performance of the targeted companies… The relatively recent entrance of hedge funds into shareholder activism has provided more evidence of gains from activism, but the long-term effects are still unknown and warrant more research.
   

“More research” arrived in the form of two major papers and a few narrower ones.

1. •In 2008 Brav, Jiang, Partnoy and Thomas found that activist investing delivers 700 basis points of higher relative return at time of announced activism, relative to a benchmark, with no subsequent reversal over time. In this study, activists succeed in full or in part in two-thirds' of their campaigns.
   

2. •In 2009, Klein and Zur found that activist investing produces 21.6 percentage points higher relative return one year after the announcement of an activist campaign. In this study, activists succeed in 60% of their campaigns.
   

Just this year, Brav, Jiang, and Kim published a definitive survey that brings together these two major papers, and three others (Boyson and Mooradian; Clifford; and Schorr and Greenwood). They combine the results from these five different efforts, all from within the past three years, to conclude, “[t]he multitude of evidence from different studies generally supports the view that hedge fund activism creates value for shareholders by effectively influencing the governance, capital structure decisions, and operating performance of target firms.”

Homework:

1. •If you can read only one bit of research for now, make sure you study the Brav, Jiang, and Kim survey paper.
   

2. •If you have time, add the paper by Klein and Zur, and perhaps the Brav, Jiang, Partnoy and Thomas paper, although the survey paper covers the latter pretty well.
   

3. •For governance aficionados, read the Gompers, Ishii and Metrick and Bebchuk, Cohen and Ferrell papers together, with true junkies analyzing the Fodor and Diavatopoulos working paper.
   

4. •Gillan and Starks provide a superb overview of activism generally, although the subsequent work highlighted here has generally superceded the results that they summarize.