The diffusion of corporate governance to emerging markets: Evaluating two dimensions of investor heterogeneity

This study investigates whether foreign institutional investors can enhance shareholder value in emerging markets. We pay special attention to two dimensions of investor heterogeneity: whether investors declare themselves to be activists, and whether activists come from countries with strong traditions of investor activism (identified by the incidence of hostile takeovers in their respective home countries). First, using an event study approach with regard to announcements of block purchases by foreign institutional investors in Korea, we find that stock prices increase only when foreign institutional investors declare themselves to be activists (increasing on average by 3% over a 20-day window). Second, we find that positive stock price reactions are more pronounced when the activist investors come from source countries with strong traditions of investor activism (increasing on average by 7% over a 20-day window). Third, we find that target firms are more likely to reduce cash holdings, raise leverage ratios, and peg dividend payouts, stock repurchases, and CEO turnover more closely to changes in earnings, but only if foreign activists come from countries with strong traditions of activism. We address possible selection bias by propensity score matching.     

Hedge fund activism,CEO turnover and compensation

This paper examines the governance role of hedge fund activists by analyzing the impact of these activists on CEO turnover, CEO pay, and CEO pay-performance link in targeted companies. Using the difference-in-difference approach, we first find significantly higher CEO turnover following hedge fund activism. After we split target companies into the CEO-turnover and non-CEO-turnover sub-samples, we find that only new CEOs in targeted companies get more compensation following hedge fund activism while incumbent CEO pay does not significantly change. The relationship between CEO bonuses and return on assets following hedge fund activism also differs across the subsamples split by CEO turnover. Pay-performance relationship is enhanced by hedge fund activism for new CEOs, but not for incumbent CEOs. In additional analyses, we document that CEO turnover is positively associated with Tobin’s Q and shareholder votes on Say on Pay in target companies after hedge fund activism.     

PRICE PRESSURE OF TRADING AND EQUITY PRICES IN HEDGE FUND ACTIVISM

In this article, I offer and examine a price pressure hypothesis, which states that stock prices of activism targets temporarily deviate from fundamentals. Increased demand for target stocks upon the formation of activist positions exerts upward pressure on targets’ stock prices in the short term. Such effects are driven by illiquid stocks whose prices are sensitive to order-flow imbalances. When activists use private transactions, price pressure effects are muted. As buying pressure subsides and reverses over the long run, targets’ stock prices decline proportionately to predisclosure accumulations, driven again by illiquid stocks. These price dynamics have important implications for activists’ block-formation strategies and, more generally, shareholder activism.     

Does institutional activism increase shareholder wealth? Evidence from spillovers on non-target companies

This paper presents evidence of the shareholder wealth effect of institutional activism using its spillovers on non-target companies. The spillovers are instructive because they are a response to an exogenous shock and thus create an environment to conduct a clean event study. In particular, we examine the spillover effects of the first target announcement of the Korea Corporate Governance Fund. As the very first sign of institutional activism in the country, this announcement creates an expectation of similar governance efforts even in non-target companies, especially in those companies whose governance is currently poorer and thus the scope for future activism is greater. Consistent with institutional activism contributing to shareholder wealth, we find that, among non-targets, those firms granting fewer rights to outside shareholders experience a more positive stock price reaction. Further analysis lends additional support to the positive wealth effect of institutional activism.     

Global Drivers of and Local Resistance to French Shareholder Activism

Shareholder activism in France has made significant advances during the past 25 years even as it continues to face formidable sources of local resistance. But if the list of corporate governance improvements since 1989 described by the authors might lead one to conclude that France now has minority shareholder protection and shareholder activism comparable to those of the U.S. or U.K., powerful local interests, including much of French management, labor, and government, continue to mount effective resistance to such forces for change. The French government still works closely with French business elites and unions to manage both individual companies and the general economy. And government officials continue to speak publicly of “protecting” French firms from “illegitimate” foreign shareholders. Accordingly, the authors characterize French corporate governance as a “hybrid” model of shareholder activism, one that incorporates the perspectives and interests of the classic French stakeholder model as well as an emerging shareholder value movement. Although foreign institutional investors have increased their shareholdings in French companies and promoted “best practice” governance rules, particularly with respect to voting rights, local forces will continue to resist aggressive shareholder activism. Such a hybrid model makes the outcomes of shareholder activism less predictable, a risk that foreign investors and companies often respond to by seeking alliances with local proxy advisers and investor associations to gain “legitimacy.”     

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.     

Voting with their feet or activism? Institutional investors’ impact on CEO turnover

We examine the relation between institutional investors and management discipline over the last several decades to better understand how CEO turnover has increased. Using a sample of forced and voluntary turnovers, we investigate the changing roles of activism and exit among institutional investors between 1982-1994 and 1995-2006. We find evidence of activist investors throughout the sample period and their impact is consistently significant in multivariate analysis. In contrast, voting with their feet has declined to the point where it no longer affects turnover outcomes. Nonetheless, activism is fairly uncommon and does not explain the higher turnover observed over time. Block holdings of known activists have increased and are linked to improving target firms. However, other blocks merely reflect the increasing size of institutional money managers. Going forward, the increasing size of institutional investors seems likely to inhibit voting with their feet while activism remains an important vehicle for change.     

Does the reputation mechanism apply to independent directors in emerging markets? Evidence from China

We examine whether reputable independent directors improve firm performance and governance quality in emerging markets, using data from China. Firms with such directors, measured as the number of directorships in other listed firms, have higher profitability, operating efficiency and productivity. They suffer from fewer agency problems, pay more cash dividends and have lower likelihoods of receiving modified audit opinions and participating in financial disclosure-related irregularities than their counterparts. In China’s unique institutional context, the reputation mechanism for independent directors applies to firms in regions with weak marketization environments, non-state-owned enterprises and firms without political connections; it also applies when external governance is weak. Overall, reputable independent directors appear to occupy valuable advising and monitoring roles and compensate for weak institutions and governance in China.     

Fund ownership and stock price informativeness of Chinese listed firms

We examine the impact of mutual fund ownership on stock price informativeness in China. Existing evidence shows that stock price informativeness is low in China, and attributes this to firms’ lack of disclosure incentives under the weak investor protection institutional environment. Mutual funds are more sophisticated and influential than individual investors to monitor firms, and thus serve as an external governance mechanism to improve corporate transparency. However, the impact of mutual funds in China can also be moderated by state ownership of listed firms, which reduces firms’ dependence on outside investors for capital. Indeed, we find that mutual fund ownership is positively related to share price informativeness, but this effect is less pronounced among state-controlled firms. The main policy implication from our findings is that mutual funds contribute to the corporate information environment of emerging economies but further privatization of listed firms would be needed to realize greater benefit.     

Tax avoidance, cost of debt and shareholder activism: Evidence from Korea

This paper examines the impact of tax avoidance on the cost of debt and its interaction effect with shareholder activism. Using Korean firms, I find a negative relationship between tax avoidance and the cost of debt, supporting the trade-off theory. Further tests reveal that the negative relationship becomes stronger when the level of institutional ownership is high. It becomes even stronger after 1998, when the shareholder rights of institutional investors were strengthened. It suggests that the managerial opportunism theory has an additional explanation for tax avoidance activities. My findings indicate that tax avoidance reduces the cost of debt through trade-offs and creates a managerial rent diversion, which is mitigated in firms with larger institutional holdings.     

The Early Returns to International Hedge Fund Activism: 2000–2010

In this summary of their recent article in the Review of Financial Studies, the authors provide an overview of the methods and findings of the first comprehensive study of worldwide hedge fund activism—one that examined the effectiveness of some 1,740 separate “engagements” of public companies by 330 different hedge funds operating in 23 countries in Asia, Europe, and North America during the period 2000‐2010. The study reports, first of all, that the incidence of shareholder activism is greatest in companies and countries with high institutional ownership, particularly U.S. institutions. In virtually all countries, with the possible exception of Japan, large holdings by institutional investors increased the probability that companies would be targeted by activists. Nevertheless, in all countries (except for the United States), foreign institutions—especially U.S. funds investing in non‐U.S. companies—have played a more important role than domestic institutional investors in supporting activism. The authors also report that those engagements that succeeded in producing “outcomes” were accompanied by positive and significant abnormal stock returns, not only upon the announcement of the activist's block purchase, but throughout the entire holding period. “Outcomes” were identified as taking one of four forms: (1) increases in dividends or stock buybacks; (2) replacement of board members; (3) corporate restructurings such as sales or spinoffs of businesses; and (4) takeover (or sale) of the entire company. But if such outcomes were associated with high shareholder returns, in the many cases where there were no such outcomes, the eventual, holding‐period returns to shareholders, even after taking account of the initially positive market reaction to news of the engagement, were indistinguishable from zero. The authors found that activists succeeded in achieving at least one of their proposed outcomes in roughly one out of two (53%) of the 1,740 engagements. But this success rate varied considerably across countries, ranging from a high of 61% for North American companies, to 50% for European companies, but only 18% engagements of Asian companies—with Japan, again, a country of high disclosure returns but unfulfilled expectations and disappointing outcomes. Outcomes also tended to be strongly associated with the roughly 25% of the total engagements that involved two or more activists (referred to as “wolfpacks”) and produced very high returns.     

机构投资者独立性对代理成本的影响

本文以2006~2009年沪深两市A股上市公司为样本,在根据投资目标对机构投资者进行类型划分的基础上,探讨了机构投资者独立性对代理成本的影响。研究发现,独立机构持股比例越高,公司管理层代理成本和控股股东代理成本越低,而非独立机构持股对两类代理成本影响有限。在进一步考虑了控股股东持股比例的影响后,发现独立机构持股在控股股东偏好控制权私有收益的情况下更能降低管理层代理成本,表明在此情况下,独立机构对管理层自利行为有更大的监督作用。     

The Rise of Agency Capitalism and the Role of Shareholder Activists in Making It Work

The past 50 years have seen a fundamental change in the ownership of U.S. public companies, one in which the relatively small holdings of many individual shareholders have been supplanted by the large holdings of institutional investors, such as pension funds, mutual funds, and bank trust departments. Such large institutional investors are now said to own over 70% of the stock of the largest 1,000 U.S. public corporations; and in many of these companies, as the authors go on to note, “as few as two dozen institutional investors” own enough shares “to exert substantial influence, if not effective control.” But this reconcentration of ownership does not represent a complete solution to the “agency” problems arising from the “separation of ownership and control” that troubled Berle and Means, the relative powerlessness of shareholders in the face of a class of “professional” corporate managers who owned little if any stock. As the authors note, this shift from an era of “managerial capitalism” to one they identify as “agency capitalism” has come with a somewhat new and different set of “agency conflicts” and associated costs. The fact that most institutional investors hold highly diversified portfolios and compete (and are compensated) on the basis of “relative performance” provides them with little incentive to engage in the vigorous monitoring of corporate performance and investor activism that could address shortfalls in such performance. As a consequence, such large institutional investors—not to mention the large and growing body of indexers like Vanguard and BlackRock—are likely to appear “rationally apathetic” about corporate governance. But, as the authors also point out, there is a solution to this agency conflict—and to the corporate governance “vacuum” that has been said to result from the alleged apathy of well‐diversified (and indexed) institutional investors: the emergence of shareholder activists. The activist hedge funds and other specialized activists who have come on the scene during the last 15 or 20 years are now playing an important role in supporting this relatively new ownership structure. Instead of taking control positions, the activists “tee‐up” strategic business and financing choices that are then decided upon by the vote of institutional shareholders that are best characterized not as apathetic, but as rationally “reticent”; that is, they allow the activists, if not to do their talking for them, then to serve as a catalyst for the expression of institutional shareholder voice. The institutions are by no means rubber stamps for activists' proposals; in some cases voting for the activists' proposals, in many cases against them, the institutions function as the long‐term arbiters of whether such proposals should and will go forward. In the closing section of the article, the authors discuss a number of recent legal decisions that appear to recognize this relatively new role played by activists and the institutions that choose to support them (or not)—legal decisions that appear to confirm investors' competence and right to be entrusted with such authority over corporate decision‐making.     

The costs of shareholder activism: Evidence from a sequential decision model

This paper provides benchmarks for monitoring costs and evaluates the net returns to shareholder activism. I model activism as a sequential decision process consisting of demand negotiations, board representation, and proxy contest and estimate the costs of each activism stage. A campaign ending in a proxy fight has average costs of $10.71 million. I find that the estimated monitoring costs reduce activist returns by more than two-thirds. The mean net activist return is close to zero but the top quartile of activists earns higher returns on their activist holdings than on their non-activist investments. The large-sample evidence presented in this paper aids in understanding the nature and evolution of activist engagements.     

Incentive alignment through performance-focused shareholder proposals on management compensation

We investigate an emerging pay-performance activism under a natural setting of performance-focused shareholder proposals rule (PSPs) (Rule 14a-8) established by the Securities and Exchange Commission (SEC) for top management compensation. We find that: (1) PSP sponsors successfully identify firms that suffer from a misalignment of managers and shareholders’ interests; (2) CEOs’ pay-for-performance sensitivity increases in the post-proposal period; and (3) shareholders benefit through positive stock returns as related to proposal filing dates; while (4) bondholders suffer significant negative returns and even more so for high-leverage firms. Our additional analyses suggest that perceived risk increase is the main driver of observed negative abnormal bond returns. However, we fail to find similar results for shareholder proposals not focused on performance (NPSPs). Collectively, our results indicate that shareholders benefit from this pay-performance activism through PSPs (but not NPSPs), but potentially at the expense of bondholders.     

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.     

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 governance, bondholder governance, and managerial risk-taking

We examine the relation between the overall corporate governance structure and managerial risk-taking behavior. We find that the overall governance structure has a significant impact on how managers make decisions on investment policy: strong bondholder governance motivates more low-risk investments such as capital expenditure and lower high-risk investments such as R&D expenditures, whereas weak shareholder governance (entrenched managers) leads to more R&D expenditures. Moreover, we find that the effects of governance on investment policy differ significantly between speculative and investment-grade firms. For speculative firms, strong bondholder or shareholder governance leads to more capital expenditures and low R&D investments. For investment-grade firms, strong bondholder or shareholder governance leads to low capital expenditures and an insignificant impact on R&D investments. Furthermore, financing and investment covenants exhibit strong binding power to deter risky investments. Finally, a more dependent (or a less independent) board is associated with low capital expenditures and high R&D investments.     

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.     

The Evolving Shareholder Activist Landscape (How Companies Can Prepare for It)

Shareholder activists remain an important force in the boardroom. More than 60 activist campaigns were initiated against S&P 1500 companies in 2016. And although activist hedge funds have under‐performed the broad market since 2013, activists’ assets under management are still nearly double their level of four years ago, and announcements of their campaigns continue to be met with increases in the target companies’ stock prices. At the same time, shareholder activism continues to evolve in constructive ways. Most important is the growing support of mainstream investors, as reflected in the increased backing of activist proposals by traditional institutional asset managers and the falling number of openly confrontational campaigns. Activists have also had continued success in gaining board representation, particularly at the largest target companies. And more board seats are being gained by activists in early settlements, which have also been associated with higher stock returns than those campaigns that resulted in later settlements or ended in a proxy contest. During the period 2006–2016, over 40% of activist campaigns made public demands for specific strategic actions, such as selling assets, spinning off divisions, or seeking buyers for the companies. And activist investors have been remarkably effective in accomplishing such changes in that those activist targets urged to seek buyers were four times more likely to be acquired than the average company. At the same time, a growing number of campaigns have focused on operating efficiency, capital allocation, business strategy, and other changes that often require longterm engagement. Perhaps because of their longer‐term focus, such campaigns have also more been likely to result in board seats for the activists. The authors' findings contain a number of messages for corporate managements and boards: listen to your shareholders, and assess your strengths and vulnerabilities through an activist's eyes; build an effective board; articulate your strategy clearly; consider the possibility of activist intervention when planning M&A transactions; and engage early when approached by an activist.