Effect Of Shareholder Activism Research Articles

The effect of shareholder activism on earnings management: Evidence from shareholder proposals

We find that in general, both accrual-based and real earnings management decrease after the passage of shareholder-sponsored governance proposals. However, when accounting for the type of proposal, we observe significant heterogeneity in the effects on earnings management. Specifically, proposals focused on changing the governance structure (e.g., board independence) lead to reductions in both types of earnings management, whereas proposals specifically targeted at improving financial reporting quality lead to decreased accrual-based earnings management but increased real earnings management. The results suggest that constraints on accrual-based earnings management induce a shift toward real earnings management. Our paper indicates that the nature of the shareholder proposal has a significant impact on shareholder intervention.

Why Do Institutional Investors Oppose Shareholder Activism? Evidence from Voting in Proxy Contests

This paper documents significant heterogeneity in institutional investors' support for shareholder activism in proxy contests and examines the following question: why do institutional shareholders frequently vote against activists when the activists’ actions increase the value of target firms? I propose that the voting decisions of institutional investors depend on the effect of shareholder activism on the return of the institutions’ combined shareholdings in both targets and their rival firms. Because institutions underweight target firms and activism could adversely affect the values of rival firms, institutional investors often lack incentives to support activists when gains on targets are diluted or offset by losses on rival firms. Using hand-collected data of mutual and pension fund voting in proxy contests, I find evidence that institutions that benefit less from activism events are less likely to support the activists, even when the activist’s effect on the target firm’s stock price is positive. Furthermore, when target firms do not have publicly-traded competitors, institutional investors are more likely to support activists. The evidence is consistent with the hypothesis that institutional investors’ portfolio returns explain whether or not they support activists.

Activists and Advocates: The Effects of Shareholder Activism on Female Board Representation

Despite decades of social and organizational commitments to increasing boardroom gender diversity, women are still underrepresented on U.S. boards. In this paper, we explore an important antecedent of female board representation: shareholder activism. Drawing on institutional theory, we predict that firms that are targeted by shareholder activists due to the lack of women on boards are likely to improve gender diversity in their boardroom to earn more legitimacy and protect themselves from further pressures. Using shareholder proposals on board diversity for S&P 1500 firms from 1997 to 2013, we found that firms that received shareholder proposals on board diversity tend to increase the number of women on their boards. Also, we found that the effect of shareholder proposals is weaker when the firm has a female CEO and demonstrates strong performance, because these organizational conditions are likely to provide them a shield that would make them less vulnerable from external pressure from shareholder activ...

Ownership Heterogeneity and Innovation:Hedge Fund Activism in Family Firms

This study analyzes the impact of ownership heterogeneity on corporate innovation strategy. Acknowledging the increasingly heterogeneous ownership landscape characterized by influential shareholders with diverging preferences we show that novel theoretical models provide a valuable guiding framework for corporate governance models. Contrary to previous research, we find that the effect of shareholder activism exercised by hedge funds on innovation is not unconditionally positive but depends on the ownership configuration. In this context, the impact of family ownership on innovation is theoretically ambiguous due to conflicting preferences. Our findings confirm our theoretical argumentation based on principal-principal theory and myopic loss aversion that conflicts between two influential principals (i.e., family owners and hedge funds) can lead to detrimental outcomes with regards to radical innovation.

Governance mechanisms and effective activism: Evidence from shareholder proposals on poison pills

Abstract This paper studies the interaction between governance mechanisms and the effectiveness of shareholder activism by examining shareholder-initiated proposals on poison pills. After contrasting companies along their governance regime, we observe that dictatorship firms, characterized with higher number of governance provisions, are associated with more activist voting by institutional groups: ownership by mutual funds, independent investment advisors and pension funds are significantly related to greater support of shareholder proposals against poison pills. In democratic firms, characterized with lower levels of restrictions on shareholder rights ownership by various shareholder groups is not as highly correlated with support for these proposals, suggesting perhaps that shareholders use other internal channels to voice concerns. In dictatorships, we find that certain shareholders rely on annual meetings to pressure management, and that management is less likely to take action following shareholder votes. Finally, among all institutional shareholders, management seems more likely to respond favorably in the presence of ownership by public pension funds.

Institutional ownership and the spillover effects of shareholder activism

Research question/issue: This study examines the spillover effects of institutional activism on non-targeted firms, which share the same ownership and size characteristics as targeted firms. Research findings/insights: We document that institutional activism leads to a significant spillover effect at non-targeted firms, which share the same ownership and size characteristics as the targeted firms. The portfolios of matching non-targeted firms experience a significant positive wealth effect on announcement of shareholder activism campaigns at a targeted firm. Managers of the matching on-targeted firms respond to the activism threats by reducing agency costs (i.e. reducing cash balance and increasing dividend payment) and by improving operating performance (i.e. improving profitability ratios and cutting down on capital and operating expenditure). We further show that shareholder activism impacts not only stock returns but also stock risk. Theoretical/academic implications: First, we study the effects of institutional activism using a new database, i.e. the Thomson Reuters shareholder activism intelligence (TRSAI), which allows us to study the effects of various types of activist investors beyond hedge funds. We highlight that the positive externalities of shareholder activism depend on institutional ownership. The higher the proportion of institutional shareholdings, the larger is the wealth effect and the decline in risk measures. However, the volatility in institutional shareholdings produces an opposite effect. Practitioner/policy implications: Our study highlights that the threat of activism as a potent force in disciplining companies extends well beyond targeted firms.

Influence of Shareholders’ Activism and Firm-level Variables on the Corporate Governance Quality in India

Corporate governance (CG) gained widespread prominence as a medium for boosting corporate performance especially after the financial crisis of 2008. With limited empirical work on factors influencing the CG quality (CGQ), this article focuses on the construction of the CG Index (CGI) by considering a total of 64 attributes encapsulated in five sub-indices followed by the investigation of effect of shareholder activism and firm-level variables on it. The estimations are based on companies listed in S&P CNX NIFTY Index from the financial year 2008–2013. The examination of results relays that both shareholder activism and firm-level variables have a significant impact on the CGQ of the firms. The significant impact of Disclosure and Board Index on the performance of firms emphasised the importance of disclosure norms in driving the performance by improving investor perceptions through higher transparency. And active board contributes in dispelling agency and managerial issues assisting in improving firm’s value. Our findings imply that shareholder activism and firm-level variables help in bolstering the quality of CG. Large concentrated holdings limit the power in few hands that deter the use of effective shareholder activism and thus should be reduced to enhance the quality of governance. The policymakers and regulators are needed to pressurise institutional investors for active participation in the companies’ routine decisions to increase vigilance regarding CG issues.

Environmental, Social and Governance Proposals and Shareholder Activism

This paper studies shareholder activism through environmental, social and governance (ESG) proposals over the period 1996 to 2015. Larger, more mature firms with higher institutional holdings are more easily targeted by these proposals. Target firms spend less on capital expenditure and research and development. An equal-weighted portfolio of target firms earns a four-factor alpha of 0.22% on the date of proposal filing. Target firms with subsequent successful proposals earn higher buy-and-hold abnormal returns over the event period and better long-term operating performances than firms whose proposals subsequently fail. These findings provide new evidence on the mechanism and effect of shareholder activism on ESG issues, and support the view that corporate social responsibility is a value-enhancing strategic opportunity rather than an agency problem.

Does “Vote No” Change Corporate Governance and Firm Value? Evidence from the Shareholder Activism of the Korean National Pension Service

:In this paper, we analyze the effect of shareholder activism on firm value through internal corporate governance in an emerging market. We investigate the shareholder activism by the National Pension Service (NPS) of Korea, the fourth-largest pension fund in the world in 2010. We investigate stock price reaction to a “vote no” press announcement and find that the market does not react in the short run, which reaction is inconsistent with the results from developed countries. We also find that firms experiencing “vote no” and improved internal corporate governance have higher firm valuation. Shareholder activism by the NPS is effective in increasing target firm value through improving internal corporate governance.

Shareholder activism in the UK: types of activists, forms of activism, and their impact on a target’s performance

Considering the recent rapid expansion of shareholder activism phenomenon in the United Kingdom (UK) and the vast amount of resources committed to it by corporations, government and investors, its effectiveness has become a crucial subject for investigation. This article analyzes organizational outcomes of shareholder activism in the UK. This research is based on a unique comprehensive database of shareholder activism events during the period of 1998–2008. We provide a detailed account of different types of activists, activism strategies and shareholder demands associated with the events of activism. Our findings show that the effectiveness of shareholder activism in terms of abnormal stock-market returns varies dramatically depending on its form, type of investor and the nature of investor proposals.

The Advent of Shareholder Activism in India

The recent spate of crises afflicting the corporate and financial sectors around the world has triggered a new wave of corporate governance reforms, which call for greater empowerment of institutional and retail shareholders. The need for such reforms cannot be greater than in India where controlling shareholders, or promoters, dominate the corporate landscape. Consistent with reforms in several countries that seek to confer greater power in the hands of shareholders, the recent regulatory developments in India signify a greater opportunity for shareholder participation in the form of postal ballot, e-voting and the like. The rapid proliferation of proxy advisory firms, a hitherto non-existent phenomenon in India, bestows shareholders with the advice necessary to exercise their corporate franchise in an informed manner. The presence of activist institutional shareholders such as private equity funds and hedge funds has already caused an upheaval in some corporate boardrooms in India. While these developments pave the way for a transformation in the tenor of the governance debate, shareholder activism encounters certain structural and institutional weaknesses embedded in the Indian markets. The dominance of controlling shareholders in most Indian companies operates to dampen the effects of shareholder activism. The legal system and institutions in India are not conducive to rendering timely and cost-effective remedies to shareholders who adopt a litigation strategy to counter managements that are perceived to act inimical to shareholder interests. This paper finds that although shareholder activism is becoming palpable in the Indian markets, its impact as a measure of corporate governance enhancement is far from clear.

Shareholder Activism and Earnings Management Incentives

In this paper, we investigate the effect of shareholder activism on earnings management. Using a sample of shareholder pay-for-performance proposals sponsored by institutional investors, we find that when compared to control firms, firms targeted by shareholder proposals have greater magnitude of discretionary accruals in their reported earnings. In addition, we find that the likelihood of meeting or beating earnings benchmarks through the use of discretionary accruals is higher for targeted firms whose managers have job security concerns due to the firms’ inferior stock performance in the past or have plans to sell company stocks. Our results are consistent with the notion that pay-for-performance proposals have unintended consequences by introducing or exacerbating incentives to manage earnings for short-term gains. The results also indicate that, for financial reporting, the short-termism effect may dominate the alignment and/or disciplinary effect of shareholder monitoring.

Comment on “Intra-Industry Effects of Shareholder Activism in Germany — Is There a Difference Between Hedge Funds and Private Equity Investments?” by Mietzner, Schweizer, and Tyrell

Comment on “Intra-Industry Effects of Shareholder Activism in Germany — Is There a Difference Between Hedge Funds and Private Equity Investments?” by Mietzner, Schweizer, and Tyrell

Much Ado About Nothing. The Effects of Hedge Fund Activism in Germany.

This paper analyses the short- and long-term effects of shareholder activism by hedge funds in German publicly listed companies. Using a hand-collected sample of investments between 1999 and 2010, I show that hedge funds are largely ineffective in substantially affecting the firms they invest in. With the exception of an increase in management turnover, benchmark-adjusted firm characteristics like dividend policy, cash holdings, capital structure, or operational performance show no unexpected changes in the years following an activist hedge fund's investment. I also show that initially positive market responses to hedge fund investments are followed by reversals in the following year, resulting in an overall effect that is indistinguishable from zero. The combined results suggest that few of the effects attributed to activist hedge funds in the US are observable in the German capital market.

Intra-Industry Effects of Shareholder Activism - Market Reactions to Hedge Fund and Private Equity Investments

Intra-Industry Effects of Shareholder Activism - Market Reactions to Hedge Fund and Private Equity Investments

The Value of Shareholder Activism: New Evidence from the Split-Share Structure Reform in China

We examine shareholder activism in the recent split-share structure reform in China. This unique event allows us to avoid the deficiencies in determining activism proxies and in measuring their effectiveness that plague the previous literature. We find that the effectiveness of shareholder activism is influenced by segmented institutional ownerships. Particularly, shareholder activism could have both positive and negative impacts on managerial behaviors in the presence of institutional investors' interest conflicts. We show that, even in its primitive stage, Chinese shareholder activism has demonstrated positive value in corporate governance.

Intra-Industry Effects of Shareholder Activism - Market Reactions to Hedge Fund and Private Equity Investments

This paper investigates the valuation effects of industry rivals to firms targeted by hedge funds and private equity investors. We argue that both types of investors differ from other blockholders due to their strong motivation and ability to actively engage and monitor. By changing a target firms' objective functions toward more of a shareholder value orientation, we find that the new institutional investors improve firm operating performance. We find that the announcement of a change in ownership structure generates statistically significant intra-industry effects for rivals to private equity and hedge fund targets. The intra-industry effects for our private equity rival portfolio are inversely related to industry concentration, and positively related to a change in profitability, the market-to-book ratio and trading volume. Considering the rivals to hedge fund targets, we identify only the market-to-book ratio as an explanatory factor. While the the long-lasting return drift to hedge fund rivals is consistent with short-term results, we find that private equity rivals suffer statistically significant losses after the announcement, which can be explained by the expected negative competitive effects.

Shareholder activism for corporate social responsibility: what do we know?

AbstractThere is a growing body of research on shareholder activism for corporate social and environmental responsibility. This paper maps and synthesizes research on this topic during 1983–2007. Five key themes emerge. (1) Several studies address shareholder proposals in the US, including proposal topics, voting results, and typical targets for such activism. (2) Other studies focus on the effects of shareholder activism on corporate policy and practice. Further, studies have been conducted on shareholder activism by (3) NGOs, (4) unions and (5) pension funds respectively. Based on this review, missing perspectives are identified and suggestions are made for future research directions. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment.

Socially and privately optimal shareholder activism

This paper aims to evaluate the private and social gains of shareholder activism in an optimal contracting framework involving dispersed shareholders who may become active. The social gains are based on the welfare to stake holders in the firm, whereas the private gains are based on shareholder wealth only. Active shareholders influence the contracting game with the CEO, and therefore also the size and the distribution of the surplus to be split between the shareholders and the CEO. Although the model is very simple and focussing on the creation and distribution of welfare between the shareholders and the CEO, we nonetheless identify surprising divergence between the private and social profitability of shareholder activism. Shareholder activism that is privately profitable is not necessarily socially profitable. The distributional effects of shareholder activism may dominate the efficiency effects to make shareholder activism a negative social NPV project.