After finishing your program at kCL you are offered a job at your favourite investment bank. Your first client is a firm based in the United States that is being targeted by an activist investor. Activist investors are investors that buy a large number of shares in a company with the goal of gaining influence and persuading the management to implement changes in firm policies. For all questions in Section B, please assume you are performing the role of an investment banker advising this client on this topic.

Q 1: Do Activists Improve the Performance of the firms they invest in? [17]

The first question your client asked you is whether he should follow the advice of the activist investor. That is, do activist investors suggestions lead to better operating performance? To answer this question you decide to produce a graph of the evolution of the return on assets (ROA) of firms targeted by activists around the activist intervention. The result of that analysis is presented in Figure 1 below. The solid line shows the estimates and the dotted lines correspond to the 95% confidence intervals.

Figure 1: Evolution of ROA before and after activist intervention. Source: Brav, Jiang, and Kim (2015)

1. (a) [4] What is the name of this type of analysis?

2. (b) [3] Using this plot, what would you answer to your client?

3. (c) [5] Your client, who also attended kCL, knows that to interpret the es- timated impact of activists on the ROA of target firms one needs to pay attention to statistical significance. Please explain what statistical signif- icance refers to and why it is important.

(d) [5]Pleasecommentontheeconomicsignificanceandstatisticalsignificance of the results plotted in figure 1.