Shareholder activism: Further evidence on the relationship between activists’ demands and shareholder value creation

• Published date: 01 October 2023
• Author: Niklas Hoss,Korbinian Eichner
• Date: 01 October 2023
• DOI: http://doi.org/10.1002/jcaf.22635

Received: 11 March 2023 Accepted: 14 April 2023

DOI: 10.1002/jcaf.22635

RESEARCH ARTICLE

Shareholder activism: Further evidence on the relationship

between activists’ demands and shareholder value creation

Niklas Hoss1Korbinian Eichner2

1Business School, Pforzheim University,

Pforzheim, Germany

2Business School, Pforzheim

University/University of St. Gallen (HSG),

Pforzheim, Germany

Correspondence

Korbinian Eichner,Professor of Corporate

Finance at Pforzheim University, Lecturer

in Finance at University of St. Gallen

(HSG). Postal address: Prof. Dr.Korbinian

Eichner, Pforzheim University,

Tiefenbronner Str. 65,Pforzheim, 75175,

Germany.

Email:

korbinian.eichner@hs-pforzheim.de

Abstract

This research article analyses activist hedge fund campaigns and studies both

shareholder value effects around the announcement of a campaign and the value

creation over the entire campaign period. Further,we analyze observable returns

by campaign objectives. We examine a sample of 197 international activism

campaigns, initiated between 2014 and 2019. Significant Cumulative Average

Abnormal Returns (CAARs) can be observed in both the short-term and the

entire engagement period event windows. The results from activism differ by

an activist investor’s objectives and demands. CAARs related to elimination of a

general undervaluation, a maximization of shareholder value,and an adjustment

of a target firm’s capital structure are the highest in our sample. We do not find

empirical evidence that board representation or proxy fights increase the CAARs

of activist investors’ campaigns. Our study adds to the existing literature by ana-

lyzing abnormal returns not only around the announcement of the campaign

but also over the entire campaign. We are of the opinion that relying exclusively

on short-term returns poses significant limitations to inferences on shareholder

value from activism and therefore applying a longer-term observation period is

warranted.

KEYWORDS

corporate finance, corporate governance, hedge funds, shareholder activism

1 INTRODUCTION

Shareholder activism is an emerging global investment

theme that keeps boardrooms busy all over the world.

While traditionally very popular in the United States, many

CEOs and CFOs in European countries have found them-

selves sitting in meetings with activist investors in recent

yearsaswell.Lazard(2019) states that 2018 was a record-

breaking year for shareholder activism. Two hundred

twenty-six companies were targeted by 131 institutional

investors that deployed a total of 65◦$bn and were able to

win 161 board seats.

Activist investors typically buy smaller,non-controlling,

stakes in companies, and if the management does not agree

to their demands, try to convince other shareholdersto join

them. After building up a position in a target company,

activist investors typically make various demands to man-

agement, including calls for sales of assets, spin-offs, share

repurchases, and dividend increases but also corporate

governance demands such as board seats, CEO replace-

ments, and ESG matters (Venkiteshwaran et al., 2010). In

order to convince management to agree to their demands,

they sometimes threaten with potential proxy fights. Many

activists then seek to increase shareholder value through

operational, strategic, and structural improvements.

As many studies have shown, if an activist acquires a

position, it often results in abnormal performance around

the announcement date with no reversal during the

J Corp Account Finance. 2023;34:157–173. ©2023 Wiley Periodicals LLC. 157wileyonlinelibrary.com/journal/jcaf

158 HOSS and EICHNER

subsequent year (Brav et al., 2008). Whilst the abnormal

performance of activist campaigns around the announce-

ment date has been studied in various papers, there

are few coherent evidence of how successful different

objectives are in terms of long-term value creation during

the campaign. This research article, therefore, defines

objectives that activists pursue when they initiate a new

campaign and measures the success of these different

objectives empirically from the announcement date to

the closing date of the campaign (i.e., the disposal of the

hedge funds’ stakes).

This research article focuses on two key objectives.

The first objective is to analyze what previous research

suggests as reasons for shareholder value creation by

activists. In this context, the typical investment process

of activist investors is described. Besides, several studies

found that shareholder activism can result in abnormal

returns, which is defined as the return a stock achieves

above the expected return over a period (MacKinlay, 1997).

Therefore, the second objective is to find reasons for

these abnormal returns empirically. The main hypothe-

sis is that activist investors are able to unlock shareholder

value through different objectives they have in mind

when they approach a company. Some of these objectives

might be particularly successful, while others are less.

The individual objectives shall therefore get defined for

each campaign from the data set and their performance

measured accordingly.

The research article is structured as follows. Section 2

provides relevant information on shareholder activism,

acting as the foundation for the empirical analysis. Sec-

tion 3identifies the research gap, on which this article

focuses. Section 4outlines the methodology and the

research design for the empirical study. Thereafter, the

empirical results are first presented through a descriptive

analysis of the data set (section 5). Subsequently,the abnor-

mal returns by campaign objective, the primary dependent

variable for this study,are presented and further analyzed.

On the basis of the results from the theoretical part and the

empirical results, a conclusion that reflects on the work

and an answer to the research question, of how activist

investors unlock shareholder value, is given (section 6).

2 ECONOMIC FUNDAMENTALS OF

SHAREHOLDER ACTIVISM

2.1 Shareholder activism and corporate

governance

Gillan and Starks (2007) describe shareholder activism as

“a response to the potential gains from addressing the

agency conflicts at the core of large publicly traded com-

panies with absentee owners” (Gillan & Starks, 2007,p.

58). Within the corporate governance literature, it has

been argued that the separation of ownership and control

leads to agency problems. Especially in large corpora-

tions, the interests of shareholders and management can

diverge substantially (Gillan & Starks, 2007). Corporate

governance mechanisms play an important role in the

minimization of agency problems. Shareholder activism

can be viewed as a catalyst which arises when other gover-

nance mechanisms, such as the Board of Directors, do not

fully fulfill their obligations.

According to Gantchev (2013) activists act in a niche

between internal governance mechanisms, for example,

monitoring by blockholders or the board of directors, and

external governance mechanisms such as the market for

corporate control. Due to the position in this niche, an

activist can be crucial for the rightful functioning of a

firm’s governance system. Generally, two different forms

of shareholder activism can be identified. If a shareholder

temporarily buys into a firm with the main purpose of

shaping corporate decisions it distinguishes him from a

long-term shareholder, such as a pension fund, who occa-

sionally engages with the management. The first form of

activism is referred to as hedge fund activism, while the lat-

ter is referred to as institutional shareholder activism. For

the purpose of this research article, the term shareholder

activism will refer to hedge fund activism.

Similar to hostile takeover bids, shareholder activists

(hedge funds) often identify firms with poor management

as a result of the separation between ownership and con-

trol (Burkart & Lee, 2015). Both the activist and a hostile

bidder thus assume that the interests and opinions of the

current shareholders are not aligned with those of the

management. They, therefore,buy an equity stake in order

to influence the value improvement of the firm. The key

difference between the two is that a hostile bidder acquires

a majority stake which leads him to full control, while the

activist only invests in a minority stake. The activist, there-

fore, needs to “work” his way to obtain the influence he

needs to achieve his objective. Activism as such transcends

a simple monitoring role and does not necessarily imply to

gain control, but rather to influence.

2.2 Literature review on the benefits

from activist campaigns

Several studies found that, on average, abnormal returns

emerge from activist investors’ campaigns. Abnormal

returns are the share price returns a company achieved

above the expected return over the same period. Among

the most prominent studies that find abnormal returns

by activists are Brav et al. (2008), who studied a large