Wachtell Keeps Running Away from the Evidence

Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. This post responds to a Wachtell Lipton memorandum by Martin Lipton and Steven A. Rosenblum, Do Activist Hedge Funds Really Create Long Term Value?, available on the Forum here. This memorandum criticizes a recently-issued empirical study by Lucian Bebchuk, Alon Brav, and Wei Jiang on the long-term effects of hedge fund activism. The empirical study is available here, and is discussed on the Forum here. Additional posts discussing the study, including critiques by Wachtell Lipton and responses by Professors Bebchuk, Brav, and Jiang, are available on the Forum here.

In a memorandum issued by the law firm of Wachtell, Lipton, Rosen & Katz (Wachtell) last week, Do Activist Hedge Funds Really Create Long Term Value?, the firm’s founding partner Martin Lipton and another senior partner of the law firm criticize again my empirical study with Alon Brav and Wei Jiang, The Long-Term Effects of Hedge Fund Activism. The memorandum announces triumphantly that Wachtell is not alone in its opposition to our study and that two staff members from the Institute for Governance of Private and Public Organizations (IGOPP) in Montreal issued a white paper (available here) criticizing our study. Wachtell asserts that the IGOPP paper provides a “refutation” of our findings that is “academically rigorous.” An examination of this paper, however, indicates that it is anything but academically rigorous, and that the Wachtell memo is yet another attempt by the law firm to run away from empirical evidence that is inconsistent with its long-standing claims.

Our study shows that the myopic activisms claim Wachtell has long advanced—the claim that that interventions by activist hedge funds are in the long term detrimental to the involved companies and their long-term shareholders—is not supported by the data. (The results of our study are summarized in a post on the Forum here and in a Wall Street Journal op-ed article available here.) Wachtell, which is well-known for developing the poison pill and other measures for insulating directors from removal, has repeatedly criticized our study. The memorandum issued last week is the fourth memorandum attacking our study that Wachtell issued; the three earlier memorandums Empiricism and Experience; Activism and Short-Termism; the Real World of Business, The Bebchuk Syllogism, and Current Thoughts About Activism are available on the Forum here, here, and here.

The white paper that Wachtell announced with excitement is authored by Yvan Allaire and François Dauphin, two IGOPP staff members. The paper raises several methodological criticisms that largely repeat ones that were made in Wachtell’s first two memos. We already responded to these claims in detail in a post, Don’t Run Away from the Evidence: A Reply to Wachtell Lipton, available on the Forum here, that explains why the criticisms raised by Wachtell (and now again by Allaire-Dauphin) do not undermine our findings and conclusions. Although we cite this post in our study, the Allaire-Dauphin paper fails to note our response or to engage with it.

Unexpectedly for an “academically rigorous” study, the Allaire-Dauphin study, like the Wachtell memos, expresses a preference reliance on the self-reported impressions of business leaders. In advancing the myopic activism claim, and in seeking legal changes that would further insulate directors from activists, Martin Lipton has been urging reliance “on the decades of my and my firm’s experience in advising corporations,” and asserting that, given the imperfections of empirical work, it would be better to use “anecdotal evidence and depth of real-world experience.” In a keynote speech, he even quipped that his dismissal of our empirical findings is supported by the fact that “100 percent of my clients agree with me.”

Taking a similar approach, the Allaire-Dauphin study stresses that “a wide range of observers with considerable financial experience and expertise take a dim view of ‘activist hedge funds,’ lambasting them for their greed-fuelled short-term stratagems,” that this group of observers includes “famed lawyer Martin Lipton.” Furthermore, Allaire and Dauphin fault Brav, Jiang, and myself for daring to “argue that these wise people, with loads of practical experience, have no ‘scientific’ basis for their collective judgment that activist interventions are detrimental.”

Like the Wachtell memo, Allaire’s and Dauphin’s “academically rigorous” paper also expresses an opposition (unexpected from an “academically rigorous” paper) to relying on empirical evidence. In arguing that there are problems with our empirical methodology, the Allaire-Dauphin study, like the Wachtell memoranda, seeks not to facilitate an empirical examination that would address these problems but rather to convince readers that it would be best to give up on empirical work in this area. The paper asserts that “econometrics provides a crude tool kit” and that any regression model cannot “capture the nuances of every situation.” Given the imperfections of empirical methods, the authors argue, “policymakers should weigh the experience and expertise of knowledgeable people rather more than tortured statistics.”

In my view, this approach to the assessment of the myopic activism claim is misguided, not academically rigorous. This claim asserts propositions concerning the financial performance and stock returns of firms that can be directly tested using objective and publicly available financial data. Policymakers should not accept the validity of these propositions even though they do not show up in the data. I would welcome future empirical work that aims at improving upon ours in some methodological or other way. In the meantime, however, Wachtell should engage with the evidence, not use the “opinions of wise people with considerable experience” to run away from it. To be a constructive contributor to policy debates, Wachtell should stop asserting that the professed beliefs of its partners or clients should serve as the factual premises of policymaking.

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