The market for partial corporate control in Europe

This paper analyzes corporate raiders in Europe during the period 1990-2001. On average, there is a positive market reaction to the first public announcement of stockholding of these investors in a company. Raiders earn abnormal profit when they sell their stakes within one year of the initial purchase. Conversely, when raiders are still shareholders in a company on 31 December 2001 abnormal returns are significant and negative. There is no clear support for the hypothesis that raiders affect firm performances at accounting level. Holderness and Sheehan (1985)’s hypotheses are not supported by the evidence. Evidence at individual investor level is provided as well. JEL classification code: G34. University of Lugano, Via Buffi 13, CH-6900 Lugano, e-mail: ettore.croci@lu.unisi. ch, Tel. +41 91 9138547, Fax. +41 91 9124647 I wish to thank Lorenzo Caprio, Giovanni Barone-Adesi, Maurizio Murgia, Emanuele Bajo, Rene Stulz, Francois Degeorge, Michel Habib, Loriano Mancini, Rosario Dell’Acquila, Fabio Trojani, and an anonymous referee. I also benefited from comments from seminar partecipants at Free University of Bozen-Bolzano, University of Bologna, University of Lugano, Universita Cattolica of Milan, the 2003 Swiss Doctoral Workshop in Finance in Gerzensee, the 2003 EFA Doctorial Tutorial in Glasgow, and the 2003 meeting of the French Finance Association in Paris for their helpful suggestions. Recent empirical evidence shows that the market for partial corporate control exists in Europe. This market is characterized by the attempt of a minority investor to influence and trigger changes in a firm’s corporate policies. Although there are different types of investors who buy blocks of stocks in public companies, only activist investors seek to exert effort to have their proposals implemented. During the 1990s, Europe started to become familiar with this kind of investors, already known in the US for a long time1. I examine a group of investors well-known for their activist behavior that operate in Europe. In particular, I collected data about their stake acquisitions in Europe during the period January 1990-December 2001. These corporate raiders differ from the typical 1980s US raider investigated by Holderness and Sheehan (1985). In fact, they are not usually interested in acquiring the full control of target firms and often (not always) cannot do it because firms have a majority shareholder. These investors normally invest in a company without the agreement of the incumbent management or majority shareholders. To some extent, they are more similar to Bethel, Liebeskind, and Opler (1998) active investors. I have no knowledge of any study that investigates raiders in Europe. The role played by these investors is quite controversial. These investors are often believed to be interested only in short-term profit. On the other hand, they are sometimes described as corporate governance champions who help introduce Anglo-Saxon shareholder value into Continental Europe. The evidence collected is used to evaluate the behavior of the raiders. The basic hypotheses are those put forward by Holderness and Sheehan (1985): the raiding hypothesis, the superior stock picking hypothesis, and the corporate governance champion hypothesis. The raiding hypothesis calls for an expropriation of corporate assets by the raider. If raiders are aboveaverage stock pickers, they should be able to earn positive abnormal returns and time the market. However, raiders have no role in improving corporate performances. Conversely, under the corporate governance champion hypothesis, raiders are the drivers of the target firm’s improvement. In addition, a fourth hypothesis is added. This hypothesis, i.e. the opportunistic behavior hypothesis, is based on the fact that raiders can change their mind and behave differently from the original strategy according to the situation.