May 7, 2015

Why Run Away from the Evidence?

Bernard S. Sharfman, George Mason University School of Business | The Harvard Law School Forum

“Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, and this post is based on a Wachtell Lipton memorandum. The post puts forward criticism of an empirical study by Lucian Bebchuk, Alon Brav, and Wei Jiang on the long-term effects of hedge fund activism; this study is available here, and its results are summarized in a Forum post and in a Wall Street Journal op-ed article. As did an earlier post by Mr. Lipton available here, this post relies on the work of Yvan Allaire and François Dauphin that is available here. A reply by Professors Bebchuk, Brav, and Jiang to this earlier memo and to the Allaire-Dauphin work is available here. Additional posts discussing the Bebchuk-Brav-Jiang study, including additional critiques by Wachtell Lipton and responses to them by Professors Bebchuk, Brav, and Jiang, are available on the Forum here.

The experience of the overwhelming majority of corporate managers, and their advisors, is that attacks by activist hedge funds are followed by declines in long-term future performance. Indeed, activist hedge fund attacks, and the efforts to avoid becoming the target of an attack, result in increased leverage, decreased investment in CAPEX and R&D and employee layoffs and poor employee morale.

Several law school professors who have long embraced shareholder-centric corporate governance are promoting a statistical study that they claim establishes that activist hedge fund attacks on corporations do not damage the future operating performance of the targets, but that this statistical study irrefutably establishes that on average the long-term operating performance of the targets is actually improved.” Read more