Does shareholder activism pay off? The answer appears to be yes, according to a study of nine prominent companies that experienced a forced change in the chief executive's office.
The study, by New Generation Research Inc., a Boston money manager, research firm and publisher of a newsletter on turnaround investing, looked at Allied-Signal Inc.; American Express Co.; Borden Inc.; Digital Equipment Corp.; General Motors Corp.; IBM Corp.; Eastman Kodak Co.; Eli Lilly & Co.; and Westinghouse Electric Corp.
"In almost all of the cases we looked at, the stock reversed a long decline after the management change and began a rebound," said the study. The only two companies showing negative returns were DEC and Borden. But even in DEC's case, the stock has shown a sharp rebound in recent months after having declined sharply after a new CEO took the helm in July 1992.
But the stock prices didn't bounce overnight. In a few cases it took about six months for the stock to bottom out: at DEC it took 18 months, and at Westinghouse, "the stock is still in the doldrums two years after the CEO was ousted."
Nevertheless, the firm is bullish on Westinghouse and K mart Corp., whose board recently replaced its CEO and named an outside director chairman of the company.
"We also conclude that investors should perk up whenever they read about a CEO being forced out. It could be an indicator of a turnaround in the making," the study said.