The Effectiveness of Institutional Activism

Abstract

We examined earnings-forecast revisions and stock returns after release of the Focus List of poorly performing companies by the Council of Institutional Investors. Using Tobin's q as a measure of a company's ability to improve performance, we found significant and positive abnormal forecast revisions and post-release stock returns for companies with q greater than 1. For companies with q less than 1, neither forecast revisions nor post-release stock returns were significantly different from zero. For the full sample of companies on the Focus List, regression analysis showed a significant positive relationship between forecast revisions and post-release stock returns. These findings support our proposition that institutional activism is effective for underperforming companies—but only those companies with the ability to respond to the challenge to improve performance.