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E-MailPeter 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 post is based on their recent paper. 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).
First, the punch line of our new empirical study: activist short selling, which we call “negative activism,” has real and lasting long-term effects. On average, the share prices of targeted companies fall by more than 20% after four years. Accounting returns plummet. Targets are more likely to be sued and investigated by regulators. The numbers are staggering.
Meanwhile, GameStop-style attacks have led some short sellers to flee the market, and targets are being placed on others. Regulators are debating new short selling restrictions. Investors are focused on the mechanics of short selling. Some public company executives are eager to deter short selling. Members of Congress are attacking short sellers, often without evidence.
Many readers of this Forum are familiar with the two main results in the literature on “positive” activism. Its announcement is associated with a short-term share price increase in the range of +7%, and this price increase is reflected in long-term improvements in shareholder value. Scholars have replicated these findings repeatedly during the past decade, generating a lively and important debate that continues today. The early literature spawned an entire field of study, and the threat of positive shareholder activism has become a front-of-mind reality for practitioners, board members, and market participants.
Our project advances the new field of negative shareholder activism, the nascent mirror-image to positive activism. A year ago, we showed that, analogous to the early literature on positive activism, negative activism announcements were associated with a mirror-image result: an immediate, short-term 7% decline in the share prices of targeted firms. We now investigate the long-term effects of negative activism, hand collecting data about activist short sellers and their campaigns. The results of our study are surprising.
First, we document the significant and negative long-term performance of companies targeted by activists. The extent of this decline is not fully reflected in the initial share price decline that occurs when negative activism is announced. Instead, the announcement is only the beginning: the magnitude of initial share price decline triples over the following years. Measures of operating performance also decline, significantly.
Second, we show that negative activist interventions are strongly associated with subsequent securities class action litigation and regulatory intervention. We report granular details about these long-term effects, and we provide “league tables” of the impact of different plaintiffs’ law firms. These findings are important for the debate about “event-driven” securities class action litigation, including in the Goldman Sachs case currently before the U.S. Supreme Court. We also report data related to the intra-corporate effects of negative activism, exploring relationships between negative activism and director and officer turnover, financial restatements, and auditor changes.
Finally, we consider implications for policy and the markets overall. We see little justification for extensive regulation of short selling, particularly bans, in light of the long-term nature of negative activism’s impact. We argue that many short-term restrictions of negative activism are unwarranted, given our evidence that short-term price impacts of negative activism generally are not later reversed or indicative of short-term manipulation. To the extent our results show that short-term reactions to the announcement of negative activism do not fully reflect long-term changes, it is often an argument for relaxing regulation of short selling, not imposing higher regulatory burdens.
We also assess three new categories of policy proposals related to the long-term effects of short selling and negative activism. We consider ways in which negative activism might reinforce the private attorney general role played by shareholders in securities class action litigation, by acting as a filter for discerning the most meritorious cases. We discuss how regulators might explicitly embrace negative activism as a signal for future investigations. Finally, we examine how negative activism might be a source of improvements in corporate governance and operations at public companies by revealing useful information, and in doing so we explore how policy changes might facilitate, encourage, and even protect boards that rely on this reporting by negative activists.
Given our new evidence, we believe scholars and policymakers should shift away from any presumptive skepticism about short selling and negative activism, and they should instead embrace these phenomena as substantively desirable, albeit perhaps intuitively unappealing, disciplining forces in the market. We see negative activists as a private law version of some public law actors—such as free speech advocates—who might appear to have normatively undesirable characteristics but whose activities are central to the protection of important principles and policy. We might not instinctively side with negative activists, just as we might not instinctively side with controversial speakers seeking First Amendment protection, but their presence, in both cases, can be central to desirable policy results.
The complete paper is available for download here.
