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.