Is Carl Icahn Good for Long-Term Shareholders? A Case Study in Shareholder Activism

The increase in activist campaigns by entrepreneurial investors and hedge funds in the past decade has raised considerable debate about their benefits for average shareholders. Although critics have longed charged that the proposals for change by such active investors typically do not increase the longer-run efficiency and values of the targeted companies, more recent studies have provided evidence of success, both in terms of increasing the market value of such companies and achieving at least some of the investors' expressed objectives. This article attempts to add to these findings by examining the case of a single well-known investor, Carl Icahn, whose career as a shareholder activist now spans at least three decades. The authors report, first of all, that Icahn's targets have included companies from a remarkable variety of industries, and that his stated objectives have varied with the industries of the targets. Although more of Icahn's targets appear to have been overleveraged than underleveraged, a significant minority have had payouts ratios that were judged to be too low and more cash than they needed. In terms of Icahn's effect on other shareholders, the authors report a significant positive stock price reaction—on the order of 10%—to the announcement of Icahn's taking a position in the target firm. When examining the subsequent performance of the target firms, the authors found a very large difference between those firms that were either taken private or acquired (within 18 months)—over a third of the target companies—and those that remained independent. The authors report that although the acquired group achieved significant positive stock market returns, the firms that remained independent suffered very negative (-60%) returns. Although Icahn's proposed changes could be responsible, as critics charge, for the performance of the latter group, the authors suggest that the success of many of these companies in fending off Icahn without enacting most of his proposed reforms is a more plausible explanation. At the same time, the authors report that Icahn was successful in achieving at least one of his stated objectives in well over half of the cases in which the target companies remained independent.     

Dynamic forecasting behavior by analysts: Theory and evidence

We develop a multi-period learning model to examine the relation between analysts’ forecasting behavior and their performance. In a competitive market for banking services, the surplus and the analyst's payoff, which is determined through bargaining, are convex in her reputation. The convexity of her payoff structure and the presence of employment risk lead to a U-shaped relation between the analyst's forecast boldness and prior performance and a positive relation between forecast boldness and experience. We find support for these predictions in our empirical analysis. Significant underperformers (outperformers) face higher (lower) employment risk and are more likely to issue bolder forecasts.     

How long has it been since the last deal? Consumer promotion timing expectations and promotional response

When modeling consumers’ forward-looking behavior using choice data on frequently purchased products, the common approach assumes that consumers have rational expectations about future promotions. Previous studies modeled such expectations using a first-order Markov (FOM) process. However, empirical evidence from several categories suggest that inter-promotion intervals can last several weeks implying that a FOM process that conditions future expectations of prices only on current-period prices can be limiting. We utilize a Proportional Hazard model (PHM) to characterize consumers’ rational expectation of future price promotion. We first show that estimating a dynamic structural model that uses a FOM specification for rational expectations can bias estimates of promotion effects with both simulation analysis and scanner panel data from four consumer packaged goods product categories. Secondly, we empirically show that a structural model employing a PHM specification for promotion expectations fits the data better than ones that assume only a FOM price or promotion expectation. Lastly, we show using an analysis of promotion policy changes that a structural model with a FOM expectation can lead to suboptimal managerial decisions.     

When do firms benefit from university–industry R&D collaborations? The implications of firm R&D focus on scientific research and technological recombination

Firms' access to academic discoveries through R&D collaborations has been shown to enhance their patent performance. However, increasing both internal and external R&D activities can lead to high knowledge redundancy and coordination costs. This paper examines what kind of R&D focus inside the firm will improve or reduce the benefits of R&D collaborations with universities. Our results show that technological recombination focus strengthens the relationship between university collaborations and patent performance, whereas scientific research focus weakens the relationship. These results also differ between young and old firms, implying that firms may shift their R&D focus according to their collaborative objectives.     

An evolutionary model of speculative attacks

We build an evolutionary model of currency crises incorporating learning through imitation and experimentation by heterogeneous agents. Foreign currency speculators in the model interact and learn over time through experimentation. Drawing on results from game theory, we show that the resulting dynamic converges to a unique long run equilibrium, in which the currency is “attacked” if the economic fundamentals are sufficiently adverse. Evolutionary selection is thus shown as a way to resolve the issue of indeterminacy of equilibria associated with models of currency crises.JEL Classification: C63, F31, D83, C72I am grateful to Jasmina Arifovic, Peter Garber, Pravin Krishna, Blake LeBaron, Nidhiya Menon, Srinivas Thiruvadanthai and Tiemen Woutersen for useful remarks and suggestions. All errors remain my own.     

India's pattern of development: What happened, what follows?

India has followed an idiosyncratic pattern of development, certainly compared with other fast-growing Asian economies. While the importance of services rather than manufacturing has been widely noted, within manufacturing India has emphasized skill-intensive rather than labor-intensive manufacturing, and industries with higher-than-average scale (though average firm size within industries is unusually small). Some of these distinctive patterns existed prior to the beginning of economic reforms in the 1980s, and stem from the idiosyncratic policies adopted after India's independence. These patterns have not changed despite reforms that have removed some policy impediments that contributed to India's distinctive path. We discuss the implications for India's future growth.     

The optimal choice of monetary policy instruments in a small open economy

Abstract.  This paper studies how the nature of shocks affects the optimal choice of monetary policy instruments in a small open economy. Three classic rules, fixed exchange rates, monetary targeting, and inflation targeting are studied and ranked by comparing with the optimal monetary policy under commitment. We find that the ranking of the simple rules can be mapped to the terms-of-trade variability that the rule allows relative to what a particular shock optimally calls for. It turns out that inflation targeting dominates the other two rules under productivity or velocity shocks, whereas monetary targeting is the best performer under fiscal shocks.