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Oklahoma State University

Finding Shareholder Activism Pays Off

Call Carl Icahn ruthless or smug. Call him activist shareholder or corporate raider. OSU finance professor Ramesh Rao’s research has found that the multibillionaire also deserves a tag not often associated with his name —shareholders’ best friend.

Rao, who holds the Paul C. Wise Chair in finance, and his students in the Ph.D. in Business for Executives program are looking at the long-term performance of shareholder activism by hedge funds.

“We generally find that it’s positive. It works to the betterment of firms,” Rao says.

Ramesh Rao

“A lot of these activists receive some scathing criticism, some of which has appeared in editorials in The Wall Street Journal. And what we find is perhaps this criticism may not be valid,” Rao adds.

Critics have accused Icahn of swooping in on companies such as Oklahoma’s Chesapeake Energy, buying a controlling interest, demanding changes then selling his shares before moving on.

In the Journal of Applied Corporate Finance, Rao’s team published findings about companies Icahn targeted over two decades.

Researchers found the stock price rose about 10 percent when Icahn announced that he was taking a position in a target firm.

“We find in general that they’ve met with pretty positive returns to shareholders over the year or so that he’s targeted them,” Rao says.

Of the 33 Icahn targets studied, a dozen companies were bought out, three were delisted, and 18 continued as independent, publicly traded firms. Independent companies typically saw a stock price increase in the short term but suffered an average 60 percent decline after two years. Researchers suggest businesses fending off Icahn without following most of his suggestions may be to blame.

For Chesapeake, the share price has soared more than 25 percent since Icahn swooped down for a second time in May 2012. He pushed reform and wrote that the board had failed in “dramatic fashion.”

Rao’s related line of research found that labor union activism also positively influences companies.

“I think the conclusion is that most forms of shareholder activism, wherever it may be emanating from, whether personalities like Carl Icahn or from labor unions, they are generally done in the right spirit — to maximize the value of the firm in the long run,” Rao says.

Shareholder activism may not be a bad omen for a company and its investors, Rao says, adding it may be an opportunity.