Negative Activism

Barbara Bliss is assistant professor of finance at the University of San Diego School of Business; Peter Molk is associate professor of law at the University of Florida Levin College of Law; and Frank Partnoy is the Adrian A. Kragen Professor of law at the University of California Berkeley School of Law. This is based on their recent article, forthcoming in the Washington University Law Review. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

What we call “positive activism” is familiar to readers here. A hedge fund acquires a stake in a company, announces it, and demands reform. The targeted company’s stock price typically increases, and a battle ensues.

We focus on the mirror image of positive activism, which we term “negative activism.” Negative activists take short positions and profit from share price declines. They have the financial incentive to destroy, rather than create, company value.

In our article Negative Activism, we identify and systematically address the concept of negative activism. First, we set forth an analytic framework, grouping negative activism into three categories. Informational negative activism seeks to reduce company values by releasing negative information about those companies. We provide empirical evidence showing that, across a wide variety of informational categories, informational negative activism is associated with statistically significant decreases in company values. Operational negative activism seeks to destroy companies’ operations, in the process reducing those companies’ stock prices.  We offer a mix of empirical and anecdotal evidence highlighting negative activists’ success in doing so.  Finally, unintentional negative activists are failed positive activists; their interventions are meant to increase company values but are instead associated with negative returns.  We provide empirical evidence on the surprising frequency of this phenomenon.

Our second goal is to address potential policy responses to negative activism. We argue that such responses should be tailored to the characteristics of the different types of negative activism. We show several ways that our analysis of negative activism can be applied to improve business and financial regulation. In the process, we demonstrate how scholars and policy makers might adopt and apply our framework to business and financial regulation of various types.

We view informational negative activism, in light of existing anti-fraud laws, as presenting minimal additional policy concerns; in fact, a case can be made for subsidizing this form of negative activism.  We see operational negative activism very differently: it is often deleterious or potentially dangerous. We suggest a new regulatory framework aimed directly at operational negative activism, and we explore the line-drawing questions of informational versus operational activism that such a system would require. We view unintentional negative activism more skeptically. Although in many ways the market reaction will provide all the deterrent that is needed, a negative market reaction to purported positive activism is an important piece of information that could justify stronger defensive responses by company management. For example, courts might take into account a negative market reaction when reviewing the reasonableness of a targeted company’s anti-takeover responses.

Like positive activism, negative activism exhibits a range of characteristics. It is important not to paint all of negative activism with a single broad brush; indeed, as we argue in the article, some types of negative activism can even be desirable. Our hope is that our rubric will help in distinguishing among these, and other, examples.

The complete paper is available for download here.

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