Shareholder wealth effects of CalPERS' activism

In the past decade, institutional investors have become more active in monitoring management and voting the shares they control. The California Public Employees' Retirement System (CalPERS) was a leader in this wave of activism. This study investigates the long-term returns an investor with public information could earn by buying a portfolio of firms targeted by CalPERS and whether the success of CalPERS' activism depends on the aggressiveness of the targeting. The evidence supports the idea that visible and aggressive activism leads to substantial increases in shareholder wealth while a quieter activism does not.     

Political influence in hedge fund activism: Causal evidence from U.S. gubernatorial election

This study examines the causal impacts of political influence on hedge fund activism in an exogenous setting of U.S. gubernatorial election. Local incumbent politicians have incentives to protect local inefficient firms from being targeted by activists because activism could lead to divestment and local worker layoffs. And such incentives can become weaker in election years because political competition increases the incumbent politician’s accountability to broader groups of stakeholders. Consistent with this prediction, the likelihood of local firms being targeted by activists is shown to be significantly higher during election years. Moreover, the firm’s political connections mitigate the effects of election, suggesting that politicians still maintain protection to connected firms. Further cross-sectional tests show that the effects of election are stronger (1) for firms with lower labor intensity, severer problem of free cash flow and lower efficiency, and (2) when the political competition is fiercer. Additional tests reveal that hedge fund activism enhances the target firm’s operating performance and creates larger value for investors when it faces weaker political influence. To sum up, our findings suggest that political influence affects hedge fund activism and the activists strategically adjust the timing of initiating campaigns according to the changes of such influence.     

THE SHAREHOLDER WEALTH EFFECTS OF CALPERS' FOCUS LIST

Shareholder activism can help to protect shareholder value by promoting sound corporate governance practices. As an active institutional investor, CalPERS takes its role in the corporate governance process very seriously. In addition to many other initiatives, CalPERS publishes each year a list of six to twelve public companies with poor corporate governance principles and poor financial performance—its well-known "Focus List"—in the hope that the managements of these companies will be motivated to improve their performance and increase shareholder value for CalPERS and their other equity owners.
In an attempt to assess the effectiveness of CalPERS' governance program, the authors examine the market impact of the Focus List and find that companies on the list experience positive excess stock returns of about 12% over the three months following release of the list. Moreover, this wealth effect is even greater for companies with a large, widely dispersed shareholder base, as might be expected given the relative inability of such shareholders to act collectively.     

The “CalPERS effect” revisited again

Smith [Smith, M., 1996. Shareholder activism by institutional investors: evidence from CALPERS. Journal of Finance 51, 227-252] and Wahal [Wahal, S., 1996. Public pension fund activism and firm performance. Journal of Financial and Quantitative Analysis 31, 1-23] identify significant positive abnormal returns surrounding the announcement of performance targetings by the California Public Employees Retirement System (CalPERS), dubbed the “CalPERS effect.” More recent studies suggest that this “CalPERS effect” continues in later samples. While I confirm the early period results, I find the results reported in studies examining later periods are driven by the inclusion of early 1992–1993 targetings and from a significant bias in the market model parameters caused by estimation during periods of known under-performance. Additionally, these results are partially driven by the failure to control for contaminating events and the use unnecessarily long event windows. Contrary to previous studies, after addressing these methodological concerns, I find no evidence to support the continued existence of a “CalPERS effect”.     

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.     

Corporate risk-taking,returns and the nature of major shareholders: Evidence from prospect theory

This paper analyses the relation between corporate risk-taking and firm performance for a sample of international listed firms over the period 2001–2013. We consider the approaches on individual behavior (specifically prospect theory) to propose a U-shaped relation between corporate risk-taking and firm returns. We find that firms adopt an attitude of risk-seeking when the expected performance is below a target performance (to avoid an anticipated loss) and an attitude of risk averse when the performance exceeds that target. This relation is affected by the economic context and the nature of the major shareholder: Firms controlled by families or institutional investors react more conservatively (taking or avoiding risk) to changes in corporate results. We are aware that our results, are affected by both the theoretical model and the temporal and spatial framework used.     

Shareholder activism of public pension funds: The political facet

This paper studies the political incentive of public pension funds in shareholder activism. Using a sample of shareholder proposals from 1993 to 2013 and a hand-collected data set of the political variables of public pension funds, we document evidence consistent with the “political attention hypothesis.” We find that the number of politicians on public pension fund boards is significantly positively related to the frequency with which portfolio firms are targeted. Moreover, the frequency of social-responsibility proposals by public pension funds increases significantly, as the funds have a greater number of board members running for election to public office. However the frequency of corporate governance proposals is not related to the number of board members running for elections to public office. Furthermore, we document that political connection between a portfolio firm and a public pension fund mitigates the firm’s likelihood of being targeted by the fund with social-responsibility proposals. This result supports the “political contribution hypothesis.” The paper provides direct evidence that public pension-fund board members employ shareholder proposals to enhance their political capital.     

The effects of adopting the Balanced Scorecard on shareholder returns

Many firms have adopted the Balanced Scorecard (BSC) as a way to implement strategy and measure firm performance. This paper uses a long-horizon event study methodology to examine the relationship between BSC adoption and shareholder returns. Using a matched pair design, we show that firms who adopt the BSC significantly outperform firms that do not adopt the BSC over a three year period beginning with the year of adoption. Our results are robust for different matching criteria. There is also evidence that firms earn greater excess returns after adoption of the BSC than before. These results provide strong evidence that the BSC is an effective strategic management tool that leads to improved shareholder returns.     

Shareholder activism and firms’ performance

Increasing attention to activist campaigns raises the question of whether they lead to better performance. The impact of different motives, demands, and proposals is still unclear and, sometimes, contradictory. We used a unique dataset of activist campaigns targeting firms in the US from 2002 to 2017 and analysed the impact of activism on firm performance, considering their specific demands. Our results show that firms experience a decline in profitability almost immediately after campaigns, although the effect is unclear in the years subsequent to the intervention. Results also suggest that campaigns primarily focused on demanding a change in strategic direction or obtaining board control intensify the decline in profitability. Seeking board representation is the type of demand that effectively increases target firms’ profitability. Our analysis adds to research on shareholder governance and competitive dynamics by highlighting that the type of demand adopted in campaigns impacts differently on firms’ performance.     

Hedge Fund Activism, Corporate Governance, and Firm Performance

Using a large hand-collected data set from 2001 to 2006, we find that activist hedge funds in the United States propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring.     

Costs of voting and firm performance: Evidence from RegTech adoption in Chinese listed firms

Employing the 2014 mandatory adoption of online shareholder voting in China, we show that the reduction of voting costs through online voting is positively related to participation in shareholder meetings and future firm performance. Our mechanism analysis suggests that the improved firm performance is mainly driven by the enhanced governance role played by informed investors and institutional investors. Further analysis shows that online shareholder voting makes the firms more attractive to mutual fund managers who are far away from the firms. Moreover, we find that the improved firm performance is concentrated in firms with low controlling shareholder ownership, and that online shareholder voting is associated with an increased likelihood of vetoing proposals and lower tunneling.     

Factors Influencing Corporate Environmental Disclosures

We investigate the effectiveness of the Carbon Disclosure Project (CDP), a not‐for‐profit organization that facilitates environmental disclosures of firms with institutional investors, thereby serving as a corporate governance mechanism for shareholders to influence the firm's environmental disclosures. We examine firm characteristics associated with firms' decisions to disclose carbon‐related information via the CDP for a sample of 319 Canadian firms over a four‐year period. In particular, we examine how firms' decisions to disclose via CDP are associated with shareholder activism, litigation risk, and the opportunity for low‐cost positive publicity once requested by the firms' “signatory” investors. Our results also show that management's decision to release climate change data is associated with domestic, but not foreign, signatory investors. We also find that disclosing firms tend to be those from lower polluting industries with less exposure to litigation risk. This suggests that this new form of coordinated shareholder activism may not be successful at altering the behavior of firms that are heavier polluters.     

Shareholder activism and voluntary disclosure

We examine the relation between shareholder activism and voluntary disclosure. An important consequence of voluntary disclosure is less adverse selection in the capital markets. One class of traders that finds less adverse selection unprofitable is activist investors who target mispriced firms whose valuations they can improve. Consistent with this idea, we find that managers issue earnings and sales forecasts more frequently when their firm is more at risk of attack by activist investors, and that these additional disclosures reduce the likelihood of becoming an activist’s target. These additional disclosures also prompt a positive price reaction, contain more precise guidance, and exceed prevailing market expectations. These findings imply that managers use voluntary disclosure to preempt activism at their firm, and that activists prefer to target relatively opaque firms.     

Do shareholder agreements affect market valuation?: Evidence from Brazilian listed firms

Shareholder agreements are contracts that govern the relationship among different shareholders in a firm. This article uses a unique dataset to analyze shareholder agreements in listed companies and shows how they affect firm valuation. While shareholder agreements may be used to expropriate value from non-controlling investors, they can also mitigate conflicts of interest and protect minority shareholders. The analysis of a broad time-series and cross-section of Brazilian listed firms provides evidence that the latter effect dominates. We build a shareholder agreement index in order to measure on a firm-level basis the degree of investor protection granted by shareholder agreements. Companies with shareholder agreements have higher valuation and the degree of investor protection granted by shareholder agreements is positively related to firm value, even after controlling for the endogeneity of the firm's decision to adopt shareholder agreements.     

Labor Unions as Shareholder Activists: Champions or Detractors?

We examine the impact of labor union shareholder activism through the submission of shareholder proposals during the period 1988–2002. We examine the effect of labor union‐sponsored shareholder proposals on announcement period returns; on the corporate governance environment of the firm including shareholder rights, board composition, and CEO compensation; on changes in unionization rates and labor expense; and on long‐run shareholder wealth. We do not find any observable patterns for the overall sample of proposals. However, subsets of proposals associated with union presence at the target firm and shareholder voting support for the proposal are associated with significant effects surrounding and subsequent to targeting.     

Success and Failure in the Market for Corporate Control: Evidence from the Petroleum Industry

A sample of firms from the oil industry is used to test whether managerial actions are consistent with the managerial entrenchment or shareholder interest hypothesis. While targeted firms have lower Q-ratios than non-targeted firms, not all low Q-ratio firms become targets. High levels of managerial stock ownership decrease the likelihood of a low Q-ratio firm being targeted. Managerial resistance to control events is associated with greater share price increases, but a lower likelihood of a control change occurring. Overall, the results are consistent with managers taking actions that protect their positions, possibly at shareholder expense.     

The spillover effect of shareholder activism: Evidence on firm reporting

This study examines the spillover effect of shareholder activism against target firms on financial reporting by non-target firms in portfolios held by the same activist shareholders. We find that firms that are not the target of institutional shareholders’ activism campaigns report more positive abnormal accruals. Cross-sectional tests indicate that the effect is more pronounced i) for firms that have more opportunities to engage in upward earnings management, or for firms with less effective alternative monitoring forces, and ii) when investors are more sensitive to good news. We also find that the effect is stronger when activist shareholders are more experienced, are waging more confrontational campaigns against target firms, and have larger holdings in non-target firms. We further find that non-target firms tend to report lower magnitude of asset write-downs, are more likely to restate financial statements and meet or beat earnings benchmarks, and exhibit a more optimistic tone in their 10-K/10-Q filings. Overall, our findings suggest that firms tend to window-dress their mandatory reporting to preempt possible shareholder activism against them.     

Corporate governance and hedge fund activism

Recently, the mainstream media have paid considerable attention to hedge funds behaving as agents of corporate change. We study this phenomenon using a unique dataset of hedge fund activism for the period 1994–2005, and find evidence that hedge fund activists improve both short-term stock performance and long-term operating performance of their targets. The most dramatic changes in performance accrue to targets where activists seek corporate governance changes and reductions in excess cash. Additionally, hedge funds themselves benefit from activism: the risk-adjusted annual performance of hedge funds seeking changes in corporate governance is about 7–11% higher than for non-activist hedge funds and hedge funds pursuing less aggressive activism. These results imply that hedge funds can facilitate long-lasting changes in corporate governance, cash flows, and operating performance that benefit target firm shareholders and hedge fund investors alike.     

Do shareholders really matter for firm performance? Evidence from the ownership characteristics of Italian listed companies

This paper studies the impact of the features of the shareholder base on the performance of a large sample of Italian listed firms between 2007 and 2019, both within and across firms. We expand the empirical evidence on the relation between shareholder type and different dimensions of firm performance by dividing shareholders into six categories, and further differentiating between domestic and foreign investors. We provide extensive evidence on the relation between firm performance and different types of shareholders, showing how diverse performance metrics are correlated with the voting rights of specific types of shareholders. Consistent with previous studies, the picture that emerges from our analysis shows that the ownership structure of Italian listed companies is characterized by a high degree of concentration. In this context, we find that ownership concentration or the presence of a controlling shareholder is in general associated with better performance. Moreover, a positive relation exists between diverse firm performance metrics and the voting rights of family shareholders, founders and foreign investors, while government ownership is detrimental in the short-term.     

Shareholder litigation rights and capital structure decisions

We exploit the staggered adoption of the universal demand (UD) laws across U.S. states, which impedes shareholder rights to initiate derivative lawsuits, as a quasi-natural experiment to examine the relation between shareholder litigation rights and firm capital structures. We find that weaker shareholder litigation rights due to the UD laws adoption lead to higher financial leverage, which enhances firm value. Furthermore, the positive relation between the UD laws adoption and financial leverage is more pronounced for firms exposed to higher shareholder litigation risk ex ante or financially constrained firms. Our evidence is consistent with lower shareholder litigation threats motivating firms to increase financial leverage.