by Daniel Keum
Are activist investors the villains? In the movie “Pretty Woman (1990),” Richard Gere plays a corporate raider who takes over a struggling shipping company. The climax of the movie is when Gere’s character punches his colleague and old-time friend Phillip Stuckey in the face (played by Jason Alexander), decides not to break up the company into pieces, and rides into the sunset with Julia Roberts who plays a “hooker with a heart of gold.”
Kaul, Nary, and Singh (2018) and Chen and Feldman (forthcoming) present careful analyses that take the magic away from this classic rom-com. Activist investors and PE funds are associated with positive returns to shareholders, both immediate upon announcement of the divestiture and a year and a half later. Shareholders should actually side with the repugnant Jason Alexander. I highly encourage everyone to read these two studies (they also provide excellent talking points with MBA students, especially those with interests in a career in finance). But do watch the movie first if you haven’t.
What I found to be compelling was how the two studies situate long-standing theories in today’s context of shareholder activism to find novel insights. By taking a deeper look into the market for corporate assets, they highlight the fact that value creation through corporate transactions is complex and that fine-grained analyses can uncover evidence of important drivers of value. In particular, they extend prior debates by examining both sides of the transaction. The question of who initiates (manager vs. activist fund) and completes the transaction (PE vs. corporate acquirers) is an important one. As noted in both studies, it would be interesting to see how activist investors affect non-financial outcomes, such as employee satisfaction or investments in sustainability and CSR.