The Determinants of Withdrawn Shareholder Proposals

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: We study more than 12,000 shareholder proposals that were filed to S&P1500 companies from 1997 to 2009, and investigate the determinants of proposal withdrawal by the sponsoring shareholder. We also study the effectiveness of withdrawn proposals as a corporate governance device.Research Findings/Insights: We find that proposals filed by influential investors are more likely to be withdrawn than proposals filed by private investors. Our empirical results show that institutional ownership (in particular by long-term, passively investing institutions) is positively related to a proposal’s withdrawal likelihood if the sponsoring shareholder is an institutional investor. We also document a negative relation between CEO ownership and the withdrawal likelihood. This effect is most pronounced for corporate governance proposals. We also show that withdrawn proposals on executive compensation change subsequent corporate pay practices.Theoretical/Academic Implications: Our paper provides the first comprehensive evidence on withdrawn shareholder proposals. We show that withdrawn proposals are a strong and important category of proposals because managers proactively prevent them from being put to a vote. Hence, our results imply that researchers should also account for withdrawn shareholder proposals when making inferences about the effectiveness of proxy proposals.Practitioner/Policy Implications: Our empirical evidence points to the importance of withdrawn shareholder proposals as a governance mechanism. Managers try to protect their own power and reputation by preventing filed shareholder proposals from being put to a vote during the annual general meeting: They enter into private negotiations with the sponsors of the proposals to accomplish a withdrawal.Note: An earlier version of this paper was circulated under the title “The Determinants of Withdrawn Shareholder Proposals”.