Investor Protection and the Long-Run Performance of Activism

Using a parsimonious measure of investor protection constructed from fund organizational characteristics, this paper documents that companies targeted by activists with better investor protection structures outperform those targeted by poor-investor-protection activists by roughly 10% per year. The outperformance is observed only for active targets for which 13Ds are filed, but not for passive 13G investments, indicating that the effect is not explained by a superior target selection ability. The evidence suggests that funds with better investor protection achieve increased profitability and valuation ratio of their targets by reducing agency costs, improving corporate governance, and collaborating with other large institutional investors