An interesting new paper calls into question a lot of claims about the merits of shareholder activism:
We focus on chronically underperforming firms and assess the roles of institutional investors in facilitating asset redeployment or entrenching managers. In aggregate, institutions exhibit a flight to quality in the equity market, selling shares in firms that subsequently fail. For underperforming firms that survive, institutional holdings are associated with improved performance, but abnormal returns are still negative and returns on assets and Tobin’s Q are still low. Our evidence suggests that many of the findings in previous research of positive relationships between institutional holdings and abnormal subsequent performance may be entirely explained by flight to quality combined with the distressed firm anomaly.
