A new study of an annual list of underperforming companies compiled by the Council of Institutional Investors suggests that stocks of those companies have trounced stock-market averages in the year following their inclusion on the list.

The council uses the list to identify potential targets for shareholder activism, meaning a push for big changes in strategy, management, or both. This year's crop of 20, unveiled Monday, includes Salomon, Upjohn, Tenneco, Melville, and Alza.

The study by Tim Opler of Ohio State University and Jonathan Sokobin of Southern Methodist University says that after the list comes out, the laggards "experience strong recoveries in both profitability and share price."

To be sure, many of the best performances -- like Chrysler, Scott Paper, International Business Machines, and American Express -- were aided by a combination of management changes and an economic rebound that snatched many cyclical and financial companies from the jaws of financial distress.

But the study says shareholder activism may deserve some of the credit. "The results of this study are broadly consistent with the view that coordinated institutional governance activism is effective," say Messrs. Opler and Sokobin.

A group representing public and private pension funds with a combined $800 billion in assets, the council serves as a forum to monitor corporate performance. As one of the pit bulls of corporate governance, its members have helped topple a chief executive or two. The authors received help on the study, but no financing, from the Washington-based Council of Institutional Investors

The study followed 97 companies that appeared on the Council's focus list in 1991, 1992 and 1993. The 1991 list produced average returns of 24.5% in the following 12 months, counting price change and dividends. That was more than 10% points better than the 13.8% return for the Standard & Poor's 500 index.

The council's 1992 list generated returns of 33.5%, compared to 22% for the S&P 500. And the 1993 list returned 18%, compared to 6% for the S&P. The lists also outperformed a "control group" of companies in similar industries.

Of course, just as they outperformed the market as a group after their listing, they underperformed broader averages prior to their selection.

In addition to the formal study, the two professors said a quick review of the past year's results indicates that the list published a year ago has returned about 35% since last October, five percentage points better than the market.

Until now, academics haven't been able to point to hard evidence that activism creates value.

But while the council's results appear to be strong, it's unclear just why these companies seem to outperform. Was it investor pressure? Corporations running scared? Changing market dynamics following the 1991 recession? Just a different version of so-called value investing, buying shares of companies in the dog house assuming something will change? Good stock-picking by the Council's researcher, Matt Aiello? The authors have their hunches, but found no "smoking gun," says Mr. Sokobin. "We will never be able to tell." In fact, Mr. Opler added yesterday, "We can't rule out that the Council has just gotten lucky."

Part of the explanation may be the weak performance of the companies prior to being put on the list. After all, the companies are already beaten-up or troubled in some way. Such higher-risk situations bring the potential for outsize rewards in a bull-market environment.

Some on the list are cyclical companies such as Chrysler, which went through a financially troubling period in the early 1990s, as well as a management change. It's plausible for Chrysler to get a boost from falling rates and a pickup in economic activity, whether or not it was being targeted by investors. Citicorp and American Express were both aided by falling interest rates.

A company doesn't always turn around immediately. IBM's stock fell by 18% after it first appeared on the list in 1991, and another 46% after the second time in 1992. By its third appearance in 1993, IBM had a new chairman and the stock began taking off.

And some companies that appear on the list remain subpar performers. Woolworth's 1991 listing was followed by 16% returns. But after its second mention in 1993, Woolworth rang up a negative 30% return, and its stock remains 33% below its low for 1991.

Some companies insist their listing had nothing to do with their rebounds. Maryla Boonstoppel, vice president for investor relations at Consolidated Freightways, said the company's turnaround was in the works when it was put on the 1993 list.

But other observers believe that publication of such lists by itself is part of the mix that contributes to outperformance -- a public kick in the pants, or management through embarrassment. There is probably little a chief executive likes less than seeing his or her company on a list of dogs.

To Jon Lukomnik, deputy comptroller for pensions for the City of New York, results are what counts. "I'm not sure if it matters" that there is no direct, irrefutable link between activism and better-performing companies, he said at the conference, "as a long as management and directors see an involved shareholder base."

Some people on Wall Street credit the activists. Marshall Acuff Jr., portfolio strategist at Smith Barney, says their efforts "have borne fruit." They have "acted by proxy for a larger universe of all shareholders," he says. "In a true democratic fashion, they have pushed for reforms that have led to enhanced shareholder value."

While he hasn't seen the new study, Mr. Acuff said "a potential for a boost in returns comes as a result of" these activist investors. He said, "I think they probably have done a real service."

Judging by investors' reaction yesterday, the council's list has yet to gain renown as a surefire predictor of outperformance. Among the stocks mentioned, Melville rose 1/2 to 35 and Tenneco rose 1/8 to 46 3/8, but Salomon fell 3/8 to 38 1/8, and Upjohn fell 3/4 to 43 7/8.

                    *    *    *

Out of the Doghouse

Companies spotlighted for poor performance
by the Council of Institutional Investors
from 1991 to 1993 that performed the best
after being singled out.
                      YEAR ON        STOCK
COMPANY                  LIST      RETURNS*
Citicorp                 1992       144.0%
Chrysler	         1991       138.8
                         1992       110.7
US Shoe                  1993       116.0
American Cynamid         1993        95.4
Scott Paper              1993        90.2
General Dynamics         
1991        87.1
                         1992        80.1
Union Carbide            
1993        80.7
Natl. Medical Enterprise 1993        77.9
American Express         1992        68.6
IBM	                 1993        68.6
* Stock returns (price change plus dividends)
in the year after listing
Sources: Tim C. Opler, Ohio State University,
and Jonathan Sokobin, Southern Methodist University