Investor Protection and the Long-Run Performance of Activism

Abstract

This paper investigates the effects of investor protection on hedge-fund activism. Using a parsimonious measure of investor protection constructed from fund organizational characteristics, we document that companies targeted by activists with better investor protection structure outperform those targeted by poor-investor-protection activists by roughly 9% per year. The outperformance is also observed in return-on-assets and valuation ratios. The effect is neither explained by superior target selection ability nor by takeover activity, but rather by increased operational efficiency and reduced agency costs of the target firms. Our findings suggest that higher investor protection is associated with higher valuation, lower agency costs, and more efficient investments.