Activist Investors and Open Market Share Repurchases (Summary)

Share repurchases are often seen as bullish and considered a signal of stock undervaluation. That shareholder activism is associated with an increase in firm value is generally accepted, but some argue that activist pressure can reflect a managerial “short-termism” that is suboptimal, perhaps even destructive, in the long term. Share repurchase critics point out that management could forgo value-creating investment opportunities in favor of repurchasing shares to “juice” earnings per share.

The authors’ analysis addresses several nuanced questions about activist involvement in share repurchases. To what extent are activists involved in firms announcing open market repurchases (OMRs)? Are they long-term or short-term shareholders? Are activist-involved OMRs timed differently than typical OMRs based on cash holdings, stock valuation, and future performance? Does it matter whether the activist truly takes an active role in the firm as opposed to passive ownership?

The authors study the impact of shareholder activism on NYSE-, NASDAQ-, and AMEX-listed firms’ OMRs using hand-collected activism data from 1997 to 2015. Because the authors are not interested solely in repurchases, they also compare activist-involved and non-activist-involved OMRs. Activist campaigns can be detected by the Schedule 13D forms that such campaigns are required to file. Activist OMRs can be subdivided into campaigns in which the activist investor’s stated goal is to initiate or increase share repurchases, increase shareholder payout, or return excess cash holdings to investors—that is, payout OMRs. Pre- and post-OMR metrics monitoring cash holdings, stock valuation, level of capital and R&D expenditures, and operating and stock performance of activist OMRs and payout OMRs are compared with those of non-activist-involved OMRs (non-activist OMRs).

In an attempt to compare apples to apples, matched samples from the same industry are employed as much as possible as well as firms that have conducted multiple OMRs in which one is activist involved and the other is not.

On average, OMRs by activist-targeted firms are not suboptimal corporate decisions with myopic motives, according to the authors’ findings. The presence of an activist is associated with improved timing of OMR announcements and is generally beneficial. Activists are not short-term investors but rather retain ownership positions of at least 5% in the target firms for an average of about two years. Long-run stock performance is examined to assess whether activist-involved OMRs are detrimental to long-term firm value. Estimations using the Fama and French five-factor model point to superior performance of activist compared with non-activist repurchases. The results show positive abnormal stock returns in the months after activist-involved OMR announcements, and the abnormal returns do not revert in subsequent years. Abnormal performance largely occurs in the immediate period after the OMR announcement.

The authors’ findings support the notion that managers can learn about their firms’ prospects from outside investors. Activist involvement appears to influence firms to announce repurchases when their shares are undervalued, but not enough evidence is available to statistically support a causal interpretation. Successful activist campaigns appear to more often result in repurchases when undervaluation exists and in dividend-related payouts when it does not. Overall, the findings provide evidence that firms have gradually substituted repurchases for dividends. The decrease in dividend payout is larger in magnitude for payout OMRs, suggesting that activist involvement is more often associated with repurchases substituting for dividends.