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Investor Protection and the Long-Run Performance of Activism

Published online by Cambridge University Press:  24 August 2018

Pouyan Foroughi ,
Namho Kang ,
Gideon Ozik  and
Ronnie Sadka
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Abstract

Using a parsimonious measure of investor protection constructed from fund organizational characteristics, this paper documents that companies targeted by activists with better investor protection structures outperform those targeted by those with poor investor protection structures by roughly 10% per year. The outperformance is observed only for active targets for which Schedule 13Ds are filed, not for passive Schedule 13G investments, indicating that the effect is not explained by a superior target-selection ability. The evidence suggests that funds with better investor protection achieve increased profitability and valuation ratio of their targets by reducing agency costs, improving corporate governance, and collaborating with other large institutional investors.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 61 - 100
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank George Aragon, Hendrik Bessembinder (the editor), Alon Brav, José-Miguel Gaspar (discussant), Wei Jiang (the referee), Oğuzhan Karakas, Robert Korajczyk, Nadya Malenko, Stephen Park, and seminar participants at the 6th Annual Hedge Fund Research Conference (Paris), Drexel University, Laval University, the University of Albany, the University of Connecticut, and the University of Rhode Island for helpful comments and suggestions.

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