New research that examined the relationship between activist investing and corporate management decision making found that companies that most efficiently allocate capital outperform the broader market.

S&P Global Market Intelligence examined return on invested capital as a broad benchmark of corporate operating efficiency for companies in the S&P 1500 equity index, activist ownership, stock buyback and capital markets activity, and overall stock market returns over one- and five-year time horizons.

Researchers found that enhanced return on invested capital was a key driver of shareholder value.

For S&P 1500 constituents, which include small-, mid-, and large-cap equity corporations, the larger the annual ROIC improvement, the greater the level of stock outperformance versus the broad market. This held true in the forward one- to five-year equity price performance timeframes.

Moreover, individual stocks with higher degrees of activist ownership had above-average positive rates of return.

The research showed that stocks exhibiting the highest combined degree of improvement in ROIC and activist share ownership outperformed the broad market by a wide margin.

But so, too, did companies without an activist stake that leveraged an activist style of capital allocation.

The report noted that activist investing was increasingly becoming a style of management decision making — “essentially a behavior” — as opposed to the traditional investor class that strives to influence management decision making through the sway of portfolio investment.

Today companies use basic plays from the activist investor playbook — stock buybacks and such capital market activity as mergers and spin-offs — as a way to optimize corporate efficiency and deliver enhanced shareholder value.

“Activist investors have been and continue to be a fact of life for public companies,” Michael Thompson, chairman of S&P Investment Advisory Services, said in a statement.

“However, our research finds that traditional activist behavior has evolved to the point that many outperforming companies have adopted an activist-style approach.”

The report said that despite activists’ tendency to draw attention to themselves and make headlines in the large-cap portion of the stock market, most of them prefer to operate in the mid-cap category.

The research showed that mid-cap companies with equity market capitalization between $2 billion and $10 billion were the most popular activist investor targets at 43.1%, followed by large-cap stocks at 30.6% and small-cap stocks (less than $2 billion) at 26.3%.

According to the report, activists’ interests may not be aligned with those of executive management and other long-term shareholders. Activist investors on average hold big positions in individual companies for a much shorter time than the tenure of senior management at those firms.

As an investor class, the report said, activist investors appeared to be actively managing portfolio risk as much as they are reputed to be addressing long-term corporate operational issues.

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