According to a study, activist investor interventions in small, newly listed corporations improve their stock performance. In “Shareholder Activism in Newly Listed Small Cap Companies” Emmanuel R. Pezier And Paolo F. Volpin Analyze a non-public data set of a UK fund’s exposures to newly listed small-cap corporations and show that “behind the scenes” exposures resulted in cumulative abnormal returns of 8% to 10%. They attribute these returns to exposure, not stock selection.
Emmanuel R. Pezier: I think there are two novel elements. First, we examine small-cap corporations which have recently gone public. So the query is: Does the “magic” of activism work in small businesses the best way we already realize it works in large businesses? And we bring completely recent and previously private data into the literature to check this query. Why are small cap IPOs interesting? Well, they’re very necessary to the functioning of the complete economy, so it seems worthwhile to look at them, their operational and liquidity problems, and the way these problems is likely to be solved through shareholder activism.
Second, the activist we studied is very unusual in the best way he raises his funds. A conventional activist fund, and even an everyday fund, raises money from investors on day one after which uses that cash over time to speculate in corporations it selects, using its stock-picking and activist engagement skills to to realize returns. But then the query naturally becomes: How much of their returns is tied to their stock-picking ability and the way much of it’s tied to their activist interventions? In contrast, the fund we studied receives unwanted stock holdings from day one – for instance, payments in kind as an alternative of money. More importantly, it has no control over which shares it receives. Therefore, the returns are unlikely to be because of stock selection, as there may be none, but somewhat to activism. This gives us a rather higher likelihood of measuring “how much” the activism magic works.
What motivated you to conduct the study?
We wondered whether the sorts of activism techniques utilized by high-profile hedge funds in large corporations also occur in small corporations and whether or not they are effective in generating returns. And we answer these questions. The answer is: yes, they’re, and yes, they’re effective.
What are the important thing findings of your study?
Good returns might be achieved by working with the management of corporations which have recently gone public and are small. And the returns attributable to interventions in these small-cap corporations are high.
We cannot really generalize and say that any such activism is widespread. All we are able to say is that the fund we studied intervenes behind the scenes and produces good results, suggesting that activism works in small-cap stocks, as we already realize it does in large-cap stocks. stocks is the case.
Who must be focused on the outcomes of your study and why?
I believe anyone who has invested in small-cap IPOs is likely to be focused on this paper. Due to changes in stock market regulations geared toward encouraging capital formation in young, high-growth corporations, large institutions are being asked to purchase increasingly more of those often “premature” small-cap IPOs. If you are an institutional investor, this is not going away – if anything, you will likely see increasingly more of those IPOs in the approaching years.
How can industry use the research results?
The study provides insights into the best way to work with small corporations which have high levels of insider ownership – meaning the danger of agency conflict is high. These insights must be of value to institutional investors who usually put money into small-cap IPOs but who may lack experience in shareholder activism.
What follow-up research does your study encourage or suggest?
Future researchers may need to look at the engagement of activists who exploit potential “fault lines” equivalent to gender, ethnicity, or nationality which will exist inside the board or senior management. In our study, we discover that fault lines can exist between the chairman and the CEO when one among them is the founding father of the corporate and there may be a big age difference between the 2 people. We imagine these fault lines explain why certain engagements turn out to be confrontational and why confrontational engagements produce the best returns.
For more information on this topic, see the complete article. “Shareholder Activism in Newly Listed Small Cap Companies” from that .
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