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Electronic copy available at: http://ssrn.com/abstract=2555701

Goodwin et al. The Long-term Efficacy of Shareholder Advocacy in the Boardroom

Proceedings of the Fourth International Conference on Engaged Management Scholarship, Tulsa, OK, September 10-14, 2014 1

Myopic Investor Myth Debunked: The Long-term Efficacy of Shareholder Advocacy

in the Boardroom

Shane Goodwin Akshay Singh

Oklahoma State University Oklahoma State University

[email protected] [email protected]

Walter Slipetz Ramesh Rao

Oklahoma State University Oklahoma State University

[email protected] [email protected] ABSTRACT

Over the past two decades, hedge fund activism has emerged as new form of corporate governance mechanism that brings

about operational, financial and governance reforms to a corporation. Many prominent business executives and legal scholars

are convinced that the entire American economy will suffer unless hedge fund activism with its perceived short-termism

agenda is significantly restricted. Shareholder activists and their proponents claim they function as a disciplinary mechanism

to monitor management and are instrumental in mitigating the agency conflict between managers and shareholders. We find

statistically meaningful empirical evidence to reject the anecdotal conventional wisdom that hedge fund activism is

detrimental to the long term interests of companies and their long term shareholders. Moreover, our findings suggest that

hedge funds generate substantial long term value for target firms and its long term shareholders when they function as a

shareholder advocate to monitor management through active board engagement.

INTRODUCTION

For society as a whole, further empowering [hedge funds] with short-term holding periods subjects Americans to lower

long-term growth and job creation…due to excessive risk taking…when corporations maximize short-term profits.

Leo Strine, Chief Justice of the Delaware Supreme Court

Columbia Law Review, March 2014

Leo Strine, the Chief Justice of the Delaware Supreme Court, the country’s most important arbiter of corporate law

recently authored a 54-page article in the Columbia Law Review with respect to his views about hedge funds and his

belief that short-term investors are detrimental to the long-term interests of American corporations, its long-term

shareholders and to society as a whole. Chief Justice Strine, many prominent business executives and legal scholars are

convinced that the entire American economy will suffer unless hedge fund activism with its perceived short-termism

agenda is significantly restricted. Shareholder activists and their proponents claim they function as a disciplinary

mechanism to monitor management and are instrumental in mitigating the agency conflict between managers and

shareholders.

In May 2014, the Delaware Court of Chancery denied Third Point, a well-known activist hedge fund, the ability to increase its ownership above 10% in Sotheby’s. Third Point, the company’s largest shareholder, sent a letter to Sotheby’s CEO in October 2013 expressing concerns regarding the company’s strategic direction, shareholder misalignment and

recommended replacing the CEO. In response, Sotheby’s adopted a unique two-tier shareholder rights plan1

(a poison pill) that purposely discriminated and severely punished any shareholder that might have an agenda that conflicts with

incumbent management2.

Although the court viewed the two-tier trigger structure as “discriminatory” — differentiating between activist and passive investors — the court found that Sotheby’s had a reasonable basis to believe that Third Point posed a threat of

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exercising disproportionate control and influence over major decisions. The court reached its decision notwithstanding the support from other large shareholders for Third Point and despite the fact that Sotheby’s management and board owned less than 1% of the company. Ironically and inexplicably, the court’s decision de facto authorized the incumbent CEO and

the board disproportionate control and influence over major decisions, notwithstanding the objections of its shareholders.

Vice Chancellor Donald Parsons, Jr. stated in his opinion “…it’s important not to overstate the way in which shareholders that

file Schedule 13Ds differ from those who file Schedule 13Gs.” The rationale for this decision coupled with the recent remarks

by Chief Justice Strine raise important policy questions about the value of hedge fund activism and its disciplinary role as an

active monitor of a firm’s management. In this paper, we suggest and empirically test the following hypothesis: hedge fund

activism through board representation is not detrimental to the long term operating performance of companies and does not

have an adverse effect on the target firm’s long term shareholders.

Agency conflict in publicly traded corporations with dispersed ownership is at the heart of corporate governance literature,

which focuses on mechanisms to discipline incumbent management. One possible solution to mitigate agency cost is for

shareholders to actively monitor the firm’s management. However, while monitoring may reduce agency and improve firm

value, this effort is not without cost and the benefits from monitoring are enjoyed by all shareholders (Grossman and Hart,

1980).

Shareholders that serve as active monitors of firm management to provide a disciplinary mechanism is not a new concept.

Earlier studies show that when institutional investors, particularly mutual funds and pension funds, follow an activist agenda,

they do not achieve significant benefits for shareholders (Black (1998), Karpoff (2001), Romano (2001), and Gillan and Starks

(2007)). However, hedge funds have increasingly engaged in shareholder activism and monitoring that differs fundamentally

from previous activist efforts by other institutional investors. Unlike mutual funds and pension funds, hedge funds are able to

influence corporate boards and managements due to key differences arising from their organizational form and the incentive

structures.

Hedge funds employ highly incentivized managers who manage large unregulated pools of capital. Because they are not

subject to regulation that governs mutual funds and pension funds, they can hold highly concentrated positions in a small

number of companies, and use leverage and derivatives to extend their reach. In addition, hedge fund managers don’t

experience conflicts of interest since they are not beholden to the management of the firms whose shares they hold. In sum,

hedge funds are better positioned to act as informed monitors than other institutional investors.

The growing literature with respect to shareholder activism identifies a significant positive stock price reaction for targeted

companies with the announcement of an activist intervention ((Brav, Jiang and Kim, 2009), Clifford (2008) and Boyson and

Mooradian (2011)). Many critics of hedge fund activism concede that there are short-term positive value increases to the target

firm and its shareholders as a result of self-interested “myopic investors”. While this “myopic investor” claim has been

regularly invoked and has had considerable influence, its supporters, including Chief Justice Strine, have thus far failed to

support their position with empirical evidence. However, the continued debate is about the long term efficacy on target firms

and the returns to all shareholders as result of hedge fund activism. Recent research by Bebchuk, Brav and Jiang (2013) find

statistically meaningful evidence that the operating performance of target firms improves following activist interventions but

no evidence to support the claim that short-term improvement was at the expense of long-term performance. However, their

paper is subject to several deficiencies.

The dataset used by Bebchuk, Brav and Jiang (2013) is consistent with the vast majority of research with respect to shareholder

activism. The sample of activist interventions is primarily constructed from Schedule 13D filings, the mandatory federal

1 A shareholder rights plan, also known as a “poison pill”, is one of the most effective defense tactics available to publicly traded

corporations. A poison pill is designed to make a potential transaction extremely unattractive to a hostile party from an economic

perspective, compelling a suitor to negotiate with the target’s Board of Directors. A poison pill is effective because it dilutes the

economic interest of the hostile suitor in the target, making the transaction both economically unattractive and impractical if pursued on

a hostile basis. 2

The two-tier structure provided for a 10 percent trigger threshold for shareholders filing a Schedule 13D (for “active” investors) and

a 20 percent trigger for shareholders filing a Schedule 13G (available to “passive” investors). The rights plan also contained a

“qualifying offer” exception, which provided that the plan would not apply to an offer for all of Sotheby’s shares and expires in one year

unless it is approved by a shareholder vote.




securities law filings under Section 13(d) of the 1934 Exchange Act. The law states that investors must file with the SEC

within 10 days of acquiring more than 5% of any class of securities of a publicly traded company if they have an interest in

influencing the management of the company. The presumption is a shareholder that files a 13D is unequivocally motivated to

change the strategic direction of the company. However, we claim that is not always the case. In fact, some activist campaigns

are centered on corporate governance reforms (i.e., board declassification, removal of shareholder rights plan, etc.) and not

meaningful long-term strategic changes to the target firm. We contend that any shareholder with sincere conviction to challenge

the current strategic direction of a firm would, ultimately, seek board representation if their demands were not supported by

the firm’s incumbent management. We view board representation as a signal of an activist’s long term commitment to the

firm. Additionally, board representation is a costly endeavor that is not borne by all shareholders which further validates the

activist’s credibility as a long term shareholder of the firm.

The vast majority of shareholder activism literature is predicated on Schedule 13D filings. However, we assert that the optimal

dataset to empirically test the long-term effects of shareholder activism should be based on board representation of target firms

by a shareholder activist. Therefore, we started with a much more expansive sample of activist interventions. Figure I illustrates

our comprehensive dataset of shareholder activist events, which includes 5,063 interventions from 1984-2013. Of those, 3,899

(77%) filed a 13D. However, approximately 32% of all activist interventions were focused on board engagement, either

through a proxy contest (1,216) or a non-proxy contest dissident campaign that resulted in board representation via private

negotiations (418) with the target management team and its board of directors. To be sure, over two-thirds (2/3) of activist

interventions did not seek board representation to actively monitor management. Moreover, GAMCO Asset Management, a

hedge fund founded by Mario Gabeli, has filed 478 13Ds since 1996. However, it has launched only 18 proxy fights (3.8%)

and won board representation only ten times (2.1%) to date. In contrast, Carl Icahn has launched proxy fights and won board

representation at eBay, Genzyme, Time Warner and Yahoo! without filing a 13D.

Accordingly, we claim that there are numerous 13D filings of activist interventions that otherwise include good performing

companies with strong management that a dissident was not compelled to seek board representation to actively monitor

management and function as a disciplinary mechanism. Additionally, there are over 90 activist interventions that led to board

representation without filing a 13D. Therefore, we assert that the optimal dataset to empirically test the long-term effects of

hedge fund activism should be based on board representation of target firms by a shareholder activist and not merely the fact

that a shareholder crossed 5% ownership and might (not will) seek to influence strategic change at the target firm. To be sure,

an activist that is willing to incur significant financial cost that is not borne by all shareholders, which Gantchev (2012)

estimates is approximately $10 million per proxy contest, has genuine conviction that the target firm requires strategic change

that management is unwilling to execute without shareholder interference.

We empirically test our manually constructed dataset of 739 activist interventions (the “Treatment Group”) that resulted in at

least one board seat granted to an activist shareholder from 1996-2013 (see Figure II). A total of 1,454 board members (see

Figure III) were elected at 670 unique target companies. This includes 336 unique dissident shareholders. Of the 739 activist

interventions in the Treatment Group, 415 (56%) target firms are still publicly-listed, 292 (40%) were sold/merged and 34

(4%) target firms filed for bankruptcy. By compiling our own database, we avoid some problems associated with survivorship

bias, reporting selection bias, and backfill, which are prevalent among other hedge fund databases.

To control for self-selection bias and endogeneity, we constructed two control groups (the “Control Groups”) of all proxy

fights campaigns that did not result in a board representation during the same period. Our dataset includes 595 firms that

launched a proxy contest for board representation. After we excluded certain events to reflect consistent sample parameters

with our Treatment Group, our Control Group I has 383 target firms that were involved in a proxy contest and either the target

firm incumbent management defeated the dissident shareholder during the voting process (193 firms) or the activist withdrew

its proxy fight campaign (190 firms). Control Group II includes only the 193 firms that were involved in a proxy contest that

the target firm incumbent management defeated the dissident shareholder during the voting process. Therefore, we examined

not only firms that granted at least one board seat to a dissident shareholder and its ex post effects (the “Treatment Group”),

but also companies that were challenged by dissatisfied shareholders and did not suffer the ex post disciplinary effects by the

dissident (the “Control Groups”).

During our investigation of abnormal returns during the review period, we employed three standard methods used by financial

economists for detecting stock return performance. In particular, the study examines: first, whether the returns to targeted

companies were systematically lower than what would be expected given standard asset pricing models; second, whether the

returns to targeted companies were lower than those of the Control Groups that experienced a similar event; and, third, whether



a portfolio based on taking positions in activism targets and holding them for five years post the board seat grant date

underperforms relative to its risk characteristics. Additionally, we modeled an 18-year (1996-2013) buy-and-hold abnormal

returns (BHAR) portfolio of all shareholder activist interventions that resulted in board representation and controlled for market

risk, firm size and value tilt relative to both Control Groups.

Using the aforementioned financial and econometric models, we find no evidence that target firms experience a “reversal of

fortune” during the five-year period following the intervention. The long-term underperformance asserted by supporters of the

myopic activism claim, and the resulting losses to long-term shareholders due to activist interventions, are not found in the

data.

Moreover, we find target firms that granted at least one board seat to an activist shareholder created positive abnormal returns

(alpha) for all shareholders during a five year period ex post the activist joining the target firm board. Additionally, those target

firms increased certain operating performance measures that are commonly used by financial economists, such as return on

assets (ROA) and market value relative to book value (Tobin’s Q) during the post event period. Further, the assertion that

myopically-focused activist investors only create value in the short-term at the expense of long-term shareholders is not

supported by the data. In fact, target firms that granted at least one board seat to an activist shareholder outperformed both

Control Groups with respect to firm operating measures and positive abnormal returns for all shareholders during the five

years ex post the activist joining the board. Our investigation and findings support the alternative hypothesis that hedge fund

activism is not detrimental to and does not have an adverse-effect on the long term interests of target firms and their long term

shareholders (see Graph 1).

Our research fills the important void with respect to the long term efficacy of shareholder activists serving as a disciplinary

mechanism on the firm by actively seeking board representation to monitor management. Additionally, we contribute to the

literature regarding shareholder activists as self-interested myopic investors at the expense of the long-term interest of the

company and its long term shareholders. Moreover, our findings have important policy implications related to the ongoing

debate on corporate governance and the rights and roles of shareholders. Although some prominent legal commentators and

presiding justices, such as Chief Justice Strine, have called for restrictions on hedge fund activism because of its perceived

short-term orientation, our findings suggest that hedge fund activism generates substantial long term value for target firms and

its long term shareholders when they function as a shareholder advocate to monitor management through active board

engagement.

LITERATURE REVIEW

In this section, we review the extant literature with respect to shareholder activism. First, we evaluate why shareholder activists

are the optimal group to be effective monitors of firm management to mitigate agency cost. Second, we will discuss why active

board engagement is the preferred path to create value rather than through passive shareholder proposals. Finally, we will

discuss how shareholders can intervene to effect change at a corporation via a proxy contest.

The separation of ownership and control in public firms gives rise to the possibility of agency conflict between the firm’s

managers and shareholders (Berle and Means (1932) and Jensen and Meckling (1976)). To the extent that this agency cost is

significant, it can have a detrimental effect on shareholder value. The agency problem in publicly traded corporations with

dispersed ownership is at the heart of corporate governance literature, which focuses on mechanisms to discipline incumbent

management. One possible solution to mitigate agency cost is for shareholders to actively monitor the firm’s management.

However, while monitoring may reduce agency and improve firm value, this effort is not without cost and the benefits from

monitoring are enjoyed by all shareholders (Grossman and Hart, 1980).

Shareholders that serve as active monitors of firm management to provide a disciplinary mechanism is not a new concept.

Gillan and Starks (2007) define shareholder activists as “investors who, dissatisfied with some aspect of a company’s

management or operations, try to bring about change within the company without a change in control.” Tirole (2006) provides

the following definition: “Active monitoring consists in interfering with management in order to increase the value of the

investors’ claims.”

However, hedge funds have increasingly engaged in shareholder activism and monitoring that differs fundamentally from

previous activist efforts by other institutional investors. Earlier studies show that when institutional investors, particularly

mutual funds and pension funds, follow an activist agenda, they do not achieve significant benefits for shareholders (Black

(1998), Karpoff (2001), Romano (2001), and Gillan and Starks (2007)). Unlike mutual funds and pension funds, hedge funds



are able to influence corporate boards and managements due to key differences arising from their organizational form and the

incentive structures.

Hedge funds employ highly incentivized managers who manage large unregulated pools of capital. Because they are not

subject to regulation that governs mutual funds and pension funds, they can hold highly concentrated positions in a small

number of companies, and use leverage and derivatives to extend their reach. In addition, hedge fund managers don’t

experience conflicts of interest since they are not beholden to the management of the firms whose shares they hold. In sum,

hedge funds are better positioned to act as informed monitors than other institutional investors.

Theory predicts that large shareholders should be effective monitors of the managers of publicly listed firms, reducing the free-

rider problem ((Shleifer and Vishny (1986) and Grossman and Hart (1980)). Yet the evidence that large shareholders increase

shareholder value is mixed. In two recent surveys, Karpoff (2001) and Romano (2001) conclude that activism conducted by

large institutional shareholders (i.e., pension funds and mutual funds) has had little impact on firm performance. Additionally,

Karpoff, Malatesta, and Walkling (1996), Wahal (1996), and Gillan and Starks (2000) report no persuasive evidence that

shareholder proposals increase firm values, improve operating performance or even influence firm policies. Therefore, hedge

funds are the best positioned to function as a shareholder advocates to monitor management through active board engagement.

Brav, Jiang, Partnoy, and Thomas (2008) find that the announcement of hedge fund activism generates abnormal returns of

more than 7% in a short window around the announcement. In addition, the authors document modest changes in operating

performance around the activism. Klein and Zur (2009) and Clifford (2007) also document significant positive abnormal

returns around the announcement of activism. Recent research by Bebchuk, Brav and Jiang (2013) find statistically meaningful

evidence that the operating performance of target firms improves following activist interventions but no evidence to support

the claim that short-term improvement was at the expense of long-term performance.

When shareholders are dissatisfied with the performance of a corporation and its’ board of directors, they can intervene via a

proxy contest. The proxy contest process is a meticulously regulated election mechanism which can be invoked when “one

group, referred to as ‘dissidents’ or ‘insurgents’ attempt to obtain seats on the firm’s board of directors currently in the hands

of another group, referred to as ‘incumbents’ or ‘management’” (Dodd and Warner, 1983).

The objective is to displace incumbents with the dissidents’ preferred candidates in order to bring about an overall improvement

in enterprise financial performance and shareholder value. Although dissident shareholders do not always obtain a majority of

board seats, in many cases they manage to capture some seats. Notwithstanding proxy contest outcome, there is evidence that

share price performance is positively and significantly associated with the proxy contest process (Dodd and Warner, 1983).

Within three years of a proxy contest event, many publicly held firms experience major changes including resignations of top

management within one year of the contest followed by sale or liquidation of the firm. Proxy contest shareholder gains derive

largely from the dissident linked sale of the corporation (DeAngelo and DeAngelo, 1989). These findings are consistent with

our investigation. Within two years of a dissident shareholder joining the board of a target firm, the CEO resigned

approximately 60% of the time and over the course of the five years 40% of our target firms were sold/merged.

Mulherin and Poulsen (1998) determined that “on average, proxy contests create value.” Research confirms that the bulk of

shareholder wealth gains arise from firms that are acquired in the period surrounding the contest. In contrast, management

turnover in firms that are not acquired results in a significant and positive effect on stock owners’ value proposition because

organizations engaged in management change out are more inclined to re-structure following a proxy contest event.

The rate of management turnover for proxy contest challenged firms is much higher compared to organizations not involved

in proxy contest activity and is directly proportional to the share of seats at the board won by proxy contenders. When the

majority of seats are won by proxy contesters, the highest management turnover is observed reflecting the importance of

intangible issues such as job security (Yen and Chen, 2005).

Bebchuk, Brav and Jiang (2013) found that contrary to the claim that hedge fund activists adversely impact the long-term

interests of organizations and their shareholders, there is evidence that activist interventions lead to improved operating

performance in the five years that follow the interventions. Venkiteshwaran, Iyer and Rao (2010) conducted a detailed study

of hedge fund activist Carl Icahn’s 13D filings and subsequent firm performance and found significant share price increases

for the target companies (of about 10%) around the time Icahn discloses his intentions publicly. Additionally, the author’s



found a significant number (1/3) of Icahn’s targets ended up being acquired or taken private within 18 months of his initial

investment. The shareholders of those companies earned abnormal returns of almost 25% from the time of Icahn’s initial

investment through the sale of the company. This finding is consistent with the DeAngelo and DeAngelo (1989) research that

shareholder gains derive largely from the dissident linked sale of the corporation.

Our research fills the important void with respect to the long term efficacy of shareholder activists serving as a disciplinary

mechanism on the firm by actively seeking board representation to monitor management. Additionally, we contribute to the

literature regarding shareholder activists as self-interested myopic investors at the expense of the long-term interest of the

company and its long term shareholders. Moreover, our findings have important policy implications related to the ongoing

debate on corporate governance and the rights and roles of shareholders. Our findings suggest that hedge fund activism

generates substantial long term value for target firms and its long term shareholders when they function as a shareholder

advocate to monitor management through active board engagement.

DATA AND METHODOLOGY

There is no central database of activist hedge funds. Therefore, we constructed an independent dataset of all activist

interventions from 1984-2013 from various sources, including Compustat, Capital IQ, FactSet, ISS Proxy Data,

SharkRepellent and the SEC’s EDGAR database. Additionally, our dataset includes Schedule 13D filings, the mandatory

federal securities law filings under Section 13(d) of the 1934 Exchange Act that investors must file with the SEC within

10 days of acquiring more than 5% of any class of securities of a publicly traded company if they have an interest in

influencing the management of the company. Our manually constructed database of shareholder activist events includes

5,063 interventions from 1984-2013 (see Figure I). Similar to Gillan and Starks (2007), we define shareholder activist

event as a purposeful intervention by “investors who, dissatisfied with some aspect of a company’s management or

operations, try to bring about change within the company without a change in control.”

Our data collection comprised a multi-step procedure. The vast majority of shareholder activism literature is predicated on

Schedule 13D filings. However, we assert that the optimal dataset to empirically test the long-term effects of shareholder

activism should be based on board representation of target firms by a shareholder activist. Therefore, we started with a

much more expansive sample of activist interventions. Our comprehensive dataset of shareholder activist events includes

5,063 interventions from 1984-2013. Of those, 3,899 (77%) filed a 13D. However, approximately 32% of all activist

interventions were focused on board engagement, either through a proxy contest (1,216) or non- proxy contest dissident

campaigns that resulted in board representation via private negotiations (418) with the target management team and

board of directors. To be sure, over two-thirds (2/3) of activist interventions did not seek board representation to actively

monitor management. Moreover, GAMCO Asset Management, a hedge fund founded by Mario Gabeli, has filed 478 13Ds

since 1996. However, it has launched only 18 proxy fights (3.8%) and won board representation only ten times (2.1%)

to date. In contrast, Carl Icahn has launched proxy fights and won board representation at eBay, Genzyme, Time Warner

and Yahoo! without filing a 13D.

Accordingly, we claim that there are numerous 13D filings of activist interventions that otherwise include good performing

companies with strong management that an activist is not compelled to seek board representation to actively monitor

management and function as a disciplinary mechanism. Additionally, there are over 90 activist interventions that led to

board representation without filing a 13D. Therefore, we assert that the optimal dataset to empirically test the long-term

effects of hedge fund activism should be based on board representation of target firms by a shareholder activist and

not merely the fact that a shareholder crossed 5% ownership and might (not will) seek to influence strategic change at the

target firm. To be sure, an activist that is willing to incur significant financial cost that is not borne by all shareholders,

which Gantchev (2012) estimates is approximately $10 million per proxy contest, has genuine conviction that the target

firm requires strategic change that management is unwilling to execute.

In our second step, we narrowed our time-frame from 1996-2013 and identified 1,039 activist interventions that resulted

in board representation either through a proxy fight or private negotiations. This sample set included 621 proxy fights

and 418 activist interventions (non-proxy contests) that resulted in board representation either through a settlement

or concessions between the target management and the dissident shareholder. Next, we excluded certain events where:

(1) the primary purpose of the filer is to be involved in the bankruptcy reorganization or the financing of a distressed

firm; and (2) the target is a closed-end fund or other non-regular corporation. We excluded duplicate campaigns by

multiple activists (i.e., the wolf-pack) so the dataset includes information about the target firm only once with respect to a

specific campaign. If a target firm were to file for bankruptcy protection or liquidation, we included financial information



from the target firm up to the Chapter 11 or Chapter 7 filing date. More specifically, the bankrupt firm would account for

100% loss as it relates to stock return and portfolio analyses. Additionally, we winsorized certain variables and financial

data at the 0.5% and 99.5% in each tail to adjust for outliers.

Our final dataset consists of 739 activist interventions (the “Treatment Group”) that resulted in at least one board seat

granted to an activist shareholder. A total of 1,454 board members were elected at 670 unique target firms. This includes

336 different dissident shareholders. Of the 739 activist interventions, 415 (56%) target firms are still publicly-listed, 292

(40%) were sold/merged and 34 (4%) target firms filed for bankruptcy. By compiling our own database, we avoid some

problems associated with survivorship bias, reporting selection bias, and backfill, which are prevalent among other

hedge fund databases. Table 1 provides descriptive statistics with respect to the Treatment Group.

Table 2 illustrates CEO changes at target firms pre-and-post a dissident joining the board after an activist campaign. Within

two years of the shareholder activist joining the board, the CEO had been replaced approximately 60% of the time.

To control for self-selection bias and endogeneity, we constructed two control groups from the set of all proxy fights

campaigns that did not result in a board representation during the same period (N=595, see Figure I). From this set,

similar to the primary sample set, we excluded certain events where: (1) the primary purpose of the filer is to be

involved in the bankruptcy reorganization or the financing of a distressed firm; and (2) the target is a closed-end fund

or other non-regular corporation. Control Group I has 383 firms that were involved in a proxy contest and either defeated

the dissident shareholder during the voting process (193 firms) or the activist withdrew its proxy fight campaign (190

firms). Control Group II includes the 193 firms that were involved in a proxy contest and defeated the dissident shareholder

during the voting process. Table 3 provides an overview of certain characteristics the target firms and the respective

shareholder activist tactics with respect to each intervention for the Treatment Group (N=739) and Control Group I

(N=383) and Control Group II (N=193).



EMPIRICAL TESTS AND RESULTS

In this section, we address and empirically test the hypothesis that hedge fund activism is not detrimental to the long

term operating performance of target firms or its long term shareholders. To test the ex post disciplinary effects by

dissident shareholders we examined and measured firm performance and long term abnormal stock returns up to five

years from the board seat grant date. Additionally, we conducted similar tests during the five year period prior to the

intervention. We contrast those results with both Control Groups.

a. Measuring Cross-Sectional Firm Operating Performance

We measure firm performance by several empirical proxies: Tobin’s Q, returns on assets (ROA), return on equity (ROE),

return on invested capital (ROIC) and stock returns, which are the most widely used and accepted firm performance

proxies. Additionally, we measured payout ratio, financial leverage and capital investment policy (CAPEX/Sales) of the

target firms for the Treatment Group and for both Control Groups.

Tobin’s Q is named after the Nobel Prize winner James Tobin and is calculated as the ratio of market value to asset

replacement value (Yermack, 1996). Tobin’s Q is calculated as:

Tobin’s Q= (Market value of assets) / (Replacement cost of assets)

As an approximation, the market value of assets is computed as market value of equity plus book value of assets minus

book value of equity, following Brown and Caylor (2006). The asset replacement value is taken as the book value of assets.

A Tobin’s Q ratio greater than one indicates the good quality of a firms investment decisions: it has invested in positive

NPV investment projects rather than in negative NPV investment projects and the returns meet or exceed expectations. In

contrast, Tobin’s Q lower than one suggests that the firm did not even earn its returns expected from investors from

the investment projects to cover the cost of capital.

Return on assets is calculated as earnings before interests, and taxes (EBIT) multiplied by the reciprocal of the effective

rate divided by the average of total assets for the year. Return on assets (ROA) indicates how efficient management is at

using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets, ROA is

generally displayed as a percentage. Sometimes this is referred to as “return on investment”, an indicator of how profitable

a company is:

Return on assets (ROA) = (EBIT * (1-tax rate)) / ((Total Assets(t) + Total Assets(t-1)) / 2)

Return on invested capital (ROIC) is calculated as earnings before interest, and taxes (EBIT) multiplied by the

reciprocal of the effective rate divided by the average of total debt and total common equity for the target firms. ROIC

calculation is used to assess a firm’s efficiency at allocating the capital under its control to profitable investments. The

return on invested capital measure gives a sense of how well a company is using its money to generate returns. The

calculation is as follows:

ROIC = (EBIT * (1-tax rate)) / ((Total Debt + Preferred Equity + Total Common Equity)(t)) + ((Total Debt

+ Preferred Equity + Total Common Equity)(t-1)) / 2)

Return on equity (ROE) is calculated as earnings after tax and interest (net income) divided by the average of total common

equity and total preferred equity plus minority interest for the target firms. ROE calculation is used to assess a firm’s

profitability by revealing how much profit a company generates with the capital shareholders have invested. The calculation

is as follows:

ROE = Net Income / ((Total Common Equity + Preferred Equity + Total Minority))

Financial leverage is calculated as total debt divided by the average of total debt, total common equity, total preferred

equity and minority interest for the target firms. Financial leverage measure the amount of debt a target firms has to is

capital base. The higher this ratio, the more leveraged the company and the greater its financial risk. Debt ratios vary widely

across industries, with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than



other industries like technology. The calculation is as follows:

Financial Leverage (Total Debt to Capital) = Total Debt / (Total Preferred Equity + Total Common Equity+ Total Debt +

Minority Interest)(t)) + ((Total Common Equity + Preferred Equity + Total Minority Interest)(t-1)) / 2)

Payout ratio is calculated as total common and preferred dividends divided by the target firm’s net income. Payout ratio is

a measure of capital (cash) distributed to the firm’s shareholders as ratio of its earnings. The calculation is as follows:

Payout ratio (Common Dividends + Preferred Dividends) / Net Income

Capital expenditures relative to sales (CAPEX / Sales) is calculated as total capital expenditures divided by the firm’s

revenues. This metric provides measure of how much the firm is investing for future growth opportunities as well as

maintaining existing fixed assets. The calculation is as follows:

CAPEX / Sales = Total Capital Expenditures / Total Revenues

Our findings of target firm performance for companies that granted at least one board seat to a dissident shareholder

are presented in Panel A in Table 4 and our findings of target firm performance for both Control Groups are presented in

Panel B and Panel C in Tables 5 and 6, respectively.

Consistent with the extant literature (Brav et al, 2008), we find that target firms’ operating performance for the

Treatment Group and both Control Groups deteriorates prior to an activist intervention (defined as the “Event”). For

example, the median ROA for the Treatment Group declines significantly from 2.45% five years prior to the Event date

to 0.49% on the date the board seat is granted to a dissident shareholder. However, both ROA and Q increased significantly

five years post the Event date. The median ROA for the Treatment Group increased from 0.49% on the grant seat date to

1.7% five years post the Event date, an increase of 250%. However, during the same period both Control Groups

experienced a decline in ROA post the Event date.

ROIC and ROE reflects a similar pattern to the ROA and Q measures discussed above. Our findings demonstrate a

significant decline for both measures during the pre-Event Date period of the activist intervention and a material

improvement once a dissident shareholder joined the board of the target firm. Although both Control Groups experienced

a comparable degradation during the pre-Event Date period – they did not experience a similar increase in improvement as

the target firms that granted at least one board seat to a shareholder activist.

Capital investment policy (CAPEX/Sales) of the target firms for the Treatment Group and for both Control Groups

experienced a decline of fixed asset investment leading into the Event. However, Panel A demonstrates that target firms

that granted at least one board to a dissident shareholder continued to experience a decline of CAPEX as a percentage

of revenue ex post the Event by approximately half of its capital spending prior to the Event. Interestingly, both Control

Groups did not experience a similar decline. In fact, Panel C illustrates that Control Group II increased its capital

spending during Event +1 above the pre-Event period. Suggesting that those target firms may have under-invested in

fixed assets leading into the Event to manage earnings – but had a “catch-up” period during Event +1 after the

incumbent management defeated the dissident in the proxy contest.

Our investigation and findings support the alternative hypothesis that hedge fund activism is not detrimental to and does

not have an adverse-effect on the long term interests of target firms and their long term shareholders.



b. Long Term Stock Returns

We examine long term stock returns for each individual target firm that granted at least one board seat to an activist

shareholder. We contrast those results with both Control Groups. To identify whether stock returns are abnormally low

or high we use a benchmark for comparative purposes. Such benchmarks of comparison are provided by the Capital

Asset Pricing Model (CAPM), the Fama-French three factor model and the Fama-French-Carhart asset-pricing model.

These models provide a prediction of the return that “normally” would be expected for a given security during a

given period and, therefore, enable us to identifying “abnormal” returns.

In particular, using the CAPM, the standard procedure is to estimate an “alpha,” the average excess return that is not

explained by co-movement with the market. We estimate the excess return on the market as the value-weight return of all

Center for Research on Security Prices (CRSP) firms incorporated in the US and listed on the NYSE, AMEX, or NASDAQ

that have a CRSP share code of 10 or 11 at the beginning of month t, good shares and price data at the beginning of t, and

good return data for t minus the one-month Treasury bill rate from Ibbotson Associates. Specifically, we estimate for each

firm i an alpha using the following regression:

rit - rf = ai + β1RMRFt + Eit

Similarly, using the Fama-French-three-factor model, the standard procedure is to estimate an “alpha,” the average excess

return that is not explained by the three market-wide factors identified in by Fama and French (1993). We estimate for each firm

i an alpha using the following regression:

rit - rf = ai + βi1RMRFt + βi2SMBt + βi3HMLt + Eit

The Fama-French factors are constructed using the six value-weight portfolios formed on size and book-to-market. SMB

(Small Minus Big) is the average return on the three small portfolios minus the average return on the three big

portfolios. HML (High Minus Low) is the average return on the two value portfolios minus the average return on the

two growth portfolios and we estimate the excess return on the market similar to the methodology used in CAPM.

Additionally, using the Fama-French-Carhart four-factor asset pricing model, the standard procedure is to estimate an

“alpha,” the average excess return that is not explained by the four market-wide factors identified by Fama and French

(1993) and by Carhart (1997). We estimate for each firm i an alpha using the following regression:

rit - rf = ai + βi1RMRFt + βi2SMBt + βi3HMLt + βi4M0Mt + Eit

We use the same methodology as we used in the Fama-French Asset Pricing Model to estimate the first three factors. We

added an additional factor to construct a Momentum factor. The momentum factor is the average return on the two high

prior return portfolios minus the average return on the two low prior return portfolios. We use six value-weight portfolios

formed on size and prior (2-12) returns to construct the MOM. The portfolios, which are formed daily, are the intersections

of two portfolios formed on size (market equity) and three portfolios formed on prior (2-12) return. The daily size

breakpoint is the median NYSE market equity. The daily prior (2-12) return breakpoints are the 30th and 70th NYSE

percentiles. The six portfolios used to construct MOM each day include NYSE, AMEX, and NASDAQ stocks with prior

return data. To be included in a portfolio for day t (formed at the end of day t-1), a stock must have a price for the end of

day t- 251 and a good return for t-21.

For each of the firms in the primarily dataset that granted at least one board seat, we estimate a daily alpha, or abnormal

return, for a five year period (annually) prior to date the board seat was granted. In addition, we estimate daily alphas

for a five year period (annually) following one day post the board seat grant date. To the extent that firms delist from the

sample we incorporate the financial returns up to the delisting date. Additionally, to the extent target firms file for Chapter

11 bankruptcy protection, we incorporate the returns from the firm up to the date of filing for bankruptcy.

Panel A in Table 7 provides results with respect to the abnormal returns (alphas) we calculated for all target firms that

granted at least one board seat to a dissident shareholder. Panel B and Panel C provide our findings of the abnormal returns

(alphas) for both Control Groups.



For each of the periods, we provide both the median and average alpha for all the firms in our sample. We also indicate the

statistical significance of our results; however, as is now well-known in the financial economics literature, the standard

error of the average of the estimated alphas understates the unobserved variability in performance, and the reported t-stats

should thus be treated as merely suggestive (Fama, 1998).

The first row in Table 8 provides our results concerning the abnormal stock return during each year for the five-year period

preceding the board seat grant date. Using the three asset pricing models, we find an alpha during the three-year period

ex ante that is negative and economically meaningful. These results, like those obtained with respect to target firm operating

performance, are consistent with the view that hedge fund activists target under-performing companies. Additionally, target

firms that granted at least one board seat outperformed both Control Groups.

What is more noteworthy, are the results concerning stock returns during the five-year period following the board seat

grant date. The average and the median of the estimated alpha are positive and statistically significant when we use the

CAPM model, the Fama-French Three Factor Asset Pricing Model and the Four Factor Model. The results provide no

support for the negative returns during these periods hypothesized by opponents of activism. More specifically, our

results suggest that hedge fund activism generates substantial long-term value for target firms and its long-term

shareholders when they act as a disciplinary mechanism to monitor management.

c. Event Study Methodology

Long-horizon event studies have an extensive history, including the original stock split event study by Fama, Fisher,

Jensen, and Roll (1969). As evidence inconsistent with the efficient markets hypothesis started to accumulate in the late

seventies and early eighties, interest in long-horizon studies continued. Evidence on the post-earnings announcement

effect (Ball and Brown, 1968, and Jones and Litzenberger, 1970), size effect (Banz, 1981), and earnings yield effect

(Basu, 1977 and 1983) contributed to skepticism about the CAPM as well as market efficiency. This evidence prompted

researchers to develop hypotheses about market inefficiency stemming from investors’ information processing biases

(DeBondt and Thaler, 1985 and 1987) and limits to arbitrage (DeLong et al., 1990a and 1990b, and Shleifer and Vishny,

1997).

The “anomalies” literature and the attempts to model the anomalies as market inefficiencies has led to a burgeoning field



known as behavioral finance. Research in this field formalizes (and tests) the security pricing implications of investors’

information processing biases. Because the behavioral biases might be persistent and arbitrage forces might take a long

time to correct the mispricing, a vast body of literature hypothesizes and studies abnormal performance over long

horizons of one-to- five years following a wide range of corporate event s. The events might be one-time (unpredictable)

phenomena like an initial public offering or a seasoned equity offering, or they may be recurring events such as earnings

announcements.

Both cumulative abnormal returns (CAR) and buy-and-hold abnormal return (BHAR) methods test the null hypothesis

that abnormal performance is equal to zero. Under each method, the abnormal return measured is the same as the returns

to a trading rule which buys sample securities at the beginning of the first period, and holds through the end of the last period.

CARs and buy-and-hold abnormal returns correspond to security holder wealth changes around an event. Further, when

applied to post-event periods, tests using these measures provide information about market efficiency, since systematically

nonzero abnormal returns following an event are inconsistent with efficiency and imply a profitable trading rule

(ignoring trading costs).

While post-event risk-adjusted performance measurement is crucial in long-horizon tests, actual measurement is not

straightforward. Two main methods for assessing and calibrating post-event risk- adjusted performance are used:

characteristic-based matching approach (also known as BHAR) and the Jensen’s alpha approach, which is also

known as the calendar-time portfolio approach (Fama, 1998 or Mitchell and Stafford, 2000). Analysis and comparison

of the methods is detailed below.

d. Buy-and-hold abnormal returns (BHAR) Approach

In recent years, following the works of Ikenberry, Lakonishok, and Vermaelen (1995), Barber and Lyon (1997), Lyon et

al. (1999), the characteristic-based matching approach (or also known as the buy-and- hold abnormal returns, BHAR) has

been widely used. Mitchell and Stafford (2000) describe BHAR returns as “the average multiyear return from a strategy of

investing in all firms that complete an event and selling at the end of a pre-specified holding period versus a comparable

strategy using otherwise similar nonevent firms.” An appealing feature of using BHAR is that buy-and-hold returns better

resemble investors’ actual investment experience than periodic (monthly) rebalancing entailed in other approaches to

measuring risk- adjusted performance. The joint-test problem remains in that any inference on the basis of BHAR hinges

on the validity of the assumption that event firms differ from the “otherwise similar nonevent firms” only in that they

experience the event. The researcher implicitly assumes an expected return model in which the matched characteristics (e.g.,

size and book-to- market) perfectly proxy for the expected return on a security. Since corporate events themselves are

unlikely to be random occurrences, i.e., they are unlikely to be exogenous with respect to past performance and expected

returns, there is a danger that the event and nonevent samples differ systematically in their expected returns notwithstanding

the matching on certain firm characteristics. This makes matching on (unobservable) expected returns more difficult,

especially in the case of event firms experiencing extreme prior performance.

Once a matching firm or portfolio is identified, BHAR calculation is straightforward. A T- month BHAR for event firm

i is defined as:

BHARi(t, T) = t = 1 to T (1 + Ri,t) - t = 1 to T (1 + RB,t)

Where RB is the return on either a non-event firm that is matched to the event firm i, or it is the return on a matched

(benchmark) portfolio. If the researcher believes that the Carhart (1997) four- factor model is an adequate description of

expected returns, then firm-specific matching might entail identifying a non-event firm that is closest to an event firm on the

basis of firm size (i.e., market capitalization of equity), book-to- market ratio, and past one- year return.

Alternatively, characteristic portfolio matching would identify the portfolio of all non-event stocks that share the same

quintile ranking on size, book-to-market, and momentum as the event firm (see Daniel, Grinblatt, Titman, and Wermers, 1997,

or Lyon, Barber, and Tsai, 1997, for details of benchmark portfolio construction). The return on the matched portfolio is the

benchmark portfolio return, RB. For the sample of event firms, the mean BHAR is calculated as the (equal or value-weighted)

average of the individual firm BHARs. Additionally, we tested the significance of each coefficient using the following

equation:



We constructed three BHAR portfolios of stocks from 1997-2013 for the Treatment Group and both Control Groups.

There were over 12,000 observations within the portfolios. We calculated the daily abnormal returns for each target firm

relative to the market benchmarks discussed previously. Portfolio I, which is all target firms that granted at least one board

seat to a dissident shareholder generated approximately 14 bps/day of risk-adjusted abnormal return (alpha) relative the

market.

Consistent with our other findings, our Treatment Group outperformed both Control Groups. Moreover, Portfolio I (the

Treatment Group) outperformed Portfolio III (the Control Group that incumbent management won the proxy contest) by

approximately 6 bps/day or 15% annually. All portfolios had high exposure to small cap stocks and a high value tilt.



Table 10 illustrates the distribution of returns to all shareholders post the activist shareholder joining the board at the

target firm. Returns are calculated starting one day after the board seat grant date through the earlier of December 31,

2013 or the delisting of the target firm due to a sale or bankruptcy.



e. Calendar-time portfolio approach (Jensen’s alpha)

The calendar-time portfolio or Jensen-alpha approach to estimating risk-adjusted abnormal performance is an alternative to

the BHAR calculation using a matched-firm approach to risk adjustment. Jaffe (1974) and Mandelker (1974) introduced

a calendar time methodology to the financial-economics literature, and it has since been advocated by many, including

Fama (1998), Mitchell and Stafford (2000) and Brav and Gompers (1997).

The distinguishing feature of the most recent variants of the approach is to calculate calendar-time portfolio returns for

firms experiencing an event, and calibrate whether they are abnormal in a multifactor regression. The estimated intercept

from the regression of portfolio returns against factor returns is the post- event abnormal performance of the sample of event

firms.

We implemented the Jensen-alpha approach for a five year period during the pre-event (i.e., prior to the dissident / activist board

seat grant date) and then post-event annually for a five year period. In each calendar month over the entire sample period, a

portfolio was constructed comprising all firms experiencing the event within the previous month. Since the number of

event firms is not uniformly distributed over the sample period, the number of firms included in a portfolio is not constant

through time. As a result, some new firms are added each month and some firms exit each month. Accordingly, the

portfolios are rebalanced each month and an equal or value-weighted portfolio excess return is calculated. The resulting

time series of monthly excess returns is regressed on the CAPM market factor and the three Fama-French (1993) factors as

follows:

Rpt – Rft = αp + βp (Rmt – Rft) + βp,SMBSMBt + βp,HMLHMLt + εpt

Where;

Rpt is the equal or value-weighted return for calendar month t for the portfolio of event firms that

experienced the event within previous T years,

Rft is the risk-free rate,

Rmt is the return on the CRSP value-weight market portfolio,

SMBpt is the difference between the return on the portfolio of “small” stocks and “big” stocks;

HMLpt is the difference between the return on the portfolio of “high” and “low” book-to-market stocks;

αp is the average monthly abnormal return (Jensen alpha) on the portfolio of event firms over the T- month

post-event period,

βp is the beta (the sensitivities) of the event portfolio to the three factors.

Inferences about the abnormal performance are on the basis of the estimated αp and its statistical significance. Since

αp is the average monthly abnormal performance over the T-month post-event period, it can be used to calculate annualized

post-event abnormal performance. Table 8 reports statistics on long-term abnormal returns associated with firms that granted

at least one board seat to an activist/dissident shareholder. We report regression estimates and t-statistics from value-weighted

calendar-time portfolio regressions. The portfolio holding period, was determined based on actual trading days and

indicates the holding period in years relative to the date that the board seat(s) was granted. For example, the portfolio

with holding period [Event +1], continually adds target firms that have added an activist/dissident shareholder to their

respective board during the year from the date the seat was granted. The portfolio holds these firms until the earlier of

December 31, 2013, a delisting date as a result of a Chapter 11 filing or a sale/merger.

We report regression results separately for all targets in Panel A of Table 11. αp is the estimate of the regression intercept

from the factor model. βp,RM RF is the loading on the market excess return. βp,SMB and βp,HML are the estimates of

portfolio factor loadings on the Fama-French size and book-to-market factors. We obtain the factor returns, market

capitalization breakpoints, and monthly risk-free rates from Ken French’s web site at Dartmouth College.

During our investigation of the presence of abnormal returns during this period, we employed three standard methods used

by financial economists for detecting stock return underperformance. In particular, the study examines whether the

returns to targeted firms were systematically lower than what would be expected given standard asset pricing models.

Our findings demonstrate that the targeted firms started to underperform relative to the market two-to-three years prior



to the board representation. More importantly, we find that those firms generated positive abnormal returns (alpha) starting

one year post the dissident joining the board. Additionally, we find no evidence that target firms experience a “reversal

of fortune” during the five-year period following the activist intervention. The long-term underperformance asserted by

supporters of the myopic activism claim, and the resulting losses to long-term shareholders due to activist interventions,

are not found in the data.

CONCLUSION

Over the past two decades, hedge fund activism has emerged as new form of corporate governance mechanism that brings

about operational, financial and governance reforms to a corporation. Many prominent business executives and legal scholars

are convinced that the entire American economy will suffer unless hedge fund activism with its perceived short-termism

agenda is significantly restricted. Shareholder activists and their proponents claim they function as a disciplinary

mechanism to monitor management and are instrumental in mitigating the agency conflict between managers and

shareholders.

The vast majority of shareholder activism literature is predicated on Schedule 13D filings. However, we assert that the

optimal dataset to empirically test the long-term effects of shareholder activism should be based on board representation

of target firms by a shareholder activist.

We find statistically meaningful empirical evidence to reject the anecdotal conventional wisdom that hedge fund activism

is detrimental to the long term interests of companies and their long term shareholders. Moreover, our findings suggest that

hedge fund activism generates substantial long term value for target firms and its long term shareholders when they function

as a shareholder advocate to monitor management through active board engagement.

Our research fills the important void with respect to the long term efficacy of shareholder activists serving as a

disciplinary mechanism on the firm by actively seeking board representation to monitor management. Additionally, we

contribute to the literature regarding shareholder activists as self-interested myopic investors at the expense of the long-

term interest of the company and its long term shareholders. Moreover, our findings have important policy implications

related to the ongoing debate on corporate governance and the rights and roles of shareholders. Although some

prominent legal commentators and presiding justices, such as Chief Justice Strine, have called for restrictions on hedge

fund activism because of its supposedly short-term orientation, our findings suggest that hedge fund activism generates

substantial long term value for target firms and its long term shareholders when they function as a shareholder advocate to

monitor management through active board engagement.



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Appendix

Figure I

Data Collection Methodology

Notes:

There is no central database of activist hedge funds. Therefore, we constructed an independent dataset of all activist

interventions from 1984-2013 from various sources. Our manually constructed database of shareholder activist events

includes 5,063 interventions from 1984-2013. Similar to Gillan and Starks (2007), we define shareholder activist event as

a purposeful intervention by “investors who, dissatisfied with some aspect of a company’s management or operations, try

to bring about change within the company without a change in control.”

Our data collection comprised a multi-step procedure. Our comprehensive dataset of shareholder activist events includes

5,063 interventions from 1984-2013. Of those, 3,899 (77%) filed a 13D. However, approximately 32% of all activist

interventions were focused on board engagement, either through a proxy contest (1,216) or dissident campaigns that

resulted in board representation via private negotiations (418) with the target management team and board of directors. In

our second step, we narrowed our time-frame from 1996-2013 and identified 1,039 activist interventions that resulted in

FactSet EDGAR Factiva CRSP

ISS Proxy Data

CapIQ

All Activist Events

(N=5,063) SharkRepellent

All Proxy Contests 1996-2013

(N=1,216) CONTROL GROUP

All Activist Events (Non-Proxy Contests) that resulted in Board

Representation

1996-2013

(N=418)

All Proxy Contests that resulted in Board Representation

1996-2013

(N=621)

All Activist Events that resulted in Board Representation

1996-2013

(N=1,039)

All Proxy Contests that DID NOT result in Board Representation

1996-2013

(N=595)

EXCLUDE SIC 6726 (Mutual Funds, etc), duplicate campaigns

by multiple Activists, Bankruptcy

data post Filing Date, Missing

data

EXCLUDE SIC 6726 (Mutual Funds, etc), duplicate campaigns

by multiple Activists, Bankruptcy

data post Filing Date, Missing

data

Treatment Group Final Data Set

1996-2013 (N=739 Firms)

Control Group I Final Data Set All Proxy Contests that did not result

in Board Representation

1996-2013

(N=383 Firms)

Control Group II Final Data Set All Proxy Contests MANAGEMENT

WON (Defeated Activist)

1996-2013

(N=193 Firms)



board representation either through a proxy fight or private negotiations. This sample set included 621 proxy fights and

418 activist interventions (non-proxy contests) that resulted in board representation either through a settlement or

concessions between the target management and the dissident shareholder. Next, we excluded certain events and if a target

firm were to file for bankruptcy protection or liquidation, we included financial information from the target firm up to the

Chapter 11 or Chapter 7 filing date.

Our final dataset (the “Treatment Group”) consists of 739 activist interventions that resulted in at least one board seat granted

to an activist shareholder. A total of 1,454 board members were elected at 670 unique target firms. This includes 336

different dissident shareholders. Of the 739 activist interventions, 415 (56%) target firms are still publicly-listed, 292 (40%)

were sold/merged and 34 (4%) target firms filed for bankruptcy. By compiling our own database, we avoid some problems

associated with survivorship bias, reporting selection bias, and backfill, which are prevalent among other hedge fund databases.

The tables below provide descriptive statistics with respect to the Treatment Group.

To control for self-selection bias and endogeneity, we constructed two control groups from the set of all proxy fights

campaigns that did not result in a board representation during the same period (N=595). Similar to the primary sample set,

we excluded certain events for parameter consistency.

Figure II

Distribution of Shareholder Activist Board Engagement Campaigns

Years

100

90

84

74

68 69

61

51

26 25 23 23

18

14

5 5

1 2

1996 1997 1999 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013



Figure III

Distribution of Shareholder Activist Elected Board Members

Years

199

179

166

139

128 127

102

88

60 59 57

54

38

28

16 11

1 2

1996 1997 1999 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013

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