Activist Mindset Drives Short- and Long-Term Stock Outperformance
S&P Global Market Intelligence Research Finds Return on Invested Capital Has Become Key Driver of Shareholder Value
Companies that are best at allocating their capital to profitable investments significantly outperform the broad market, according to new research published by S&P Global Market Intelligence, a leading provider of multi-asset class research data and insights. The new report, Exploring Links Among Long-Termism, Activist Behavior, Corporate Governance, And Shareholder Return examines the relationship between activist investing and corporate management decision-making to identify specific catalysts to long-term stock price growth.
Tracking the performance of the S&P 1500 equity index between 2004 and 2015, the report analyzes trends in total return on invested capital (ROIC), activist ownership, stock buyback and capital markets activity, and overall stock market returns over 1- and 5-year time horizons. It finds that the activist style of investing, which puts a premium on efficient allocation of capital, has become a key driver of shareholder value for small-, mid-, and large-cap companies.
Following are some of the key observations:
- Activist Mindset Drives Short- and Long-Term Stock Outperformance: Annual rates of ROIC are positively correlated with above-market rates of return, suggesting that the companies that with the best performance in allocating their capital to profitable investments also achieve superior stock performance over 1- and 5-year time horizons.
- Presence of Activist Stake with ROIC Improvement Signals Above-Market Returns: Stocks displaying the highest combined degree of improvement in ROIC and activist share ownership significantly outperform the broad stock market. However, even without an activist stake, companies leveraging the activist style of aggressive capital allocation also outperform.
- Research Underscores Fundamental Shift in Corporate Governance Strategy: Activist investing is increasingly becoming a style of management decision-making, driving many corporations to behave like activists with or without the presence of activist investors.
- Activist Alignment with Management/Shareholders Essential: On average, activist investors hold significant positions in individual companies for a much shorter time period than the tenure of senior management at those firms, suggesting that the interests of activists may not be aligned with those of executive management and other long-term shareholders.
“Activist investors have been and continue to be a fact of life for public companies,” said Michael Thompson, Chairman, S&P Investment Advisory Services. “However, our research finds that traditional activist behavior has evolved to the point that many outperforming companies have adopted an activist-style approach.”
The S&P Global Market Intelligence report Exploring Links Among Long-Termism, Activist Behavior, Corporate Governance, And Shareholder Return is available in full here.
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