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Investor Protection and the Long-Run Performance of Activism

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  • Foroughi, Pouyan
  • Kang, Namho
  • Ozik, Gideon
  • Sadka, Ronnie

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.

Suggested Citation

  • Foroughi, Pouyan & Kang, Namho & Ozik, Gideon & Sadka, Ronnie, 2019. "Investor Protection and the Long-Run Performance of Activism," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(1), pages 61-100, February.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:01:p:61-100_00
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    Cited by:

    1. Feng, Felix Zhiyu & Xu, Qiping & Zhu, Caroline H., 2021. "Caught in the crossfire: How the threat of hedge fund activism affects creditors," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 128-143.
    2. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah, & Quresh, Shakir & Ahmad, Mushtaq, 2020. "Internal pyramid structure, contract enforcement, minority investor protection, and firms’ performance: Evidence from emerging economies," Research in International Business and Finance, Elsevier, vol. 52(C).
    3. Alessandro Zattoni & Emmanouil Dedoulis & Stergios Leventis & Hans Van Ees, 2020. "Corporate governance and institutions—A review and research agenda," Corporate Governance: An International Review, Wiley Blackwell, vol. 28(6), pages 465-487, November.

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