Assessing Impacts of Activist Investors on Target Stakeholders - An Exploratory Investigation

Abstract

This research examines what activist investors' impact are on the stakeholders of their target firms. It analyzes investor types and their strategies using theories from Stewardship, Traditional Finance, and ESG (Environmental, Social & Governance). The sequential exploratory mixed methodology used includes reviewing literature, interviews, and analysis qualitatively and quantitatively. Qualitatively, narratives are uncovered from textual evidence from the investors, target, and regulatory stakeholders. Quantitatively, Capital Asset Pricing Model and Fama-French 5-factor models are used to uncover impacts on shareholders.

The results show the most significant positive abnormal stock returns five and thirty-one days around announcements with a lack of generalizability as the focus is on the U.S. market and small sample sizes. Cevian Capital and Ownership Capital interviews stress the importance of active ownership, ESG-integration, influence means, and conducting independent research.

Therefore, Pershing Square's engagement with Chipotle Mexican Grill was chosen from sample to explore impacts in-depth over a longer period. Results support activist investors' ability to evoke positive changes yet, in this case, mainly driven by ESG reporting, insertion of board members, and a significant ownership stake. Mostly positive impacts on the target stakeholders were observed, yet, the causality of other direct changes initiated by Pershing Square is difficult to attribute based on public information. Shareholders were impacted negatively across most of the period, primarily driven by food safety issues.

Conclusively, activist investors have the potential to mitigate specific risks associated with their targets determined by their motivations, incentives, and influence on their target. Practical application of accountability towards stakeholders with ESG reporting and better governance practices is concluded as a viable short- and long-term strategy. However, critically dependent on thorough case-specific measurement and monitoring of these practices. Depending on the level of change sought, stakeholders can be comparatively impacted disproportionally as a function of their rights and influence.