Can the market identify prosperous activist engagements? Evidence from announcement and long-term buy-and-hold returns

Abstract

We document a discrepancy between abnormal announcement returns (CAARs) and two-year buy-and-hold abnormal returns (BHARs) of activist engagements. Activist targets that earn the highest two-year BHARs yield, on average, only marginally higher CAARs than the other targets. This indicates that financial markets have difficulties to consistently distinguish between long-term top-performing engagements and other engagements at the announcement of an engagement. Even the best activists frequently suffer low or negative two-year BHARs. Long-term top-performing targets have significantly different firm characteristics than the other targets, which may help to increase the probability of selecting future top performing engagements. However, activists do not solely engage in such targets. We conclude that the long-term performance of target firms seems to be driven by a combination of target firm characteristics, investor skills, and potentially some luck, but provides only limited follow-on investment strategies for outside investors.