Interpretable Machine Learning Models for Predicting the Next Targets of Activist Funds (2404.16169v2)

Abstract: This work develops a predictive model to identify potential targets of activist investment funds, which strategically acquire significant corporate stakes to drive operational and strategic improvements and enhance shareholder value. Predicting these targets is crucial for companies to mitigate intervention risks, for activists to select optimal targets, and for investors to capitalize on associated stock price gains. Our analysis utilizes data from the Russell 3000 index from 2016 to 2022. We tested 123 variations of models using different data imputation, oversampling, and machine learning methods, achieving a top AUC-ROC of 0.782. This demonstrates the model's effectiveness in identifying likely targets of activist funds. We applied the Shapley value method to determine the most influential factors in a company's susceptibility to activist investment. This interpretative approach provides clear insights into the driving forces behind activist targeting. Our model offers stakeholders a strategic tool for proactive corporate governance and investment strategy, enhancing understanding of the dynamics of activist investing.