Does Proxy Access Increase Shareholder Wealth? Evidence from a Natural Experiment

Abstract

The financial crisis of 2008 and the subsequent 2010 Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) led to a revision of shareholder proxy access rules by the SEC in August 2010. Seemingly technical in nature, proxy access -- the right for shareholders to nominate a candidates to a public firm's board of directors -- lies at the heart of shareholder control and has far-reaching consequences in the balance of power between shareholders and managements.We use the repeal of new proxy access rules by the U.S. Court of Appeals as a natural experiment to analyze whether proxy access creates or destroys shareholder value. We finds that the repeal of the proxy access reform resulted in a decline of valuations for firms with plausibly entrenched managements, smaller firms in which investors could have made greater use of enhanced proxy access, and firms in which more investors qualified to make immediate use of greater proxy access. Further, the results indicate that the intended proxy access reform had rather weak effects: there are no valuation changes for large firms, firms that have only few anti-takeover provisions and firms in which no single investor could have made immediate use of greater proxy access. Finally, we find no evidence that the market expected special interest investors (unions and pension funds) to be sufficiently empowered to be able to push through politically motivated, value-destroying policies. We conclude that whenever proxy access was strong enough to affect firm valuations, the market valued proxy access reform positively, leading to an increase in shareholder wealth.