Shareholder Activism through the Proxy Process
Finance & Accounting
|Speaker:||Peter Szilagyi, Judge Business School, Cambridge|
|Date:||Friday 14 May 2010|
|Location:||MBA Lecture Theatre|
This paper provides evidence on the corporate governance role of shareholder-initiated proxy proposals. Previous studies debate over whether activist shareholders use proxy proposals to discipline firms or to advance their self-serving agendas, and whether these proposals are ultimately effective in addressing governance concerns. Using a sample of 2,800 proposals and 2,000 target and nontarget firms, we find that activists use the proxy process as a disciplinary mechanism and as such are valuable monitoring agents. First, proposals are more likely to be submitted against firms that use antitakeover provisions to entrench management, have ineffective boards, have ill-incentivized CEOs, and maintain low leverage. Second, proposal announcements in the proxy statements are met with significantly positive abnormal stock returns. The abnormal returns and the subsequent voting outcomes are sensitive to the proposal's objective and sponsoring shareholder, and are highest for proposals that are takeover-related or sponsored by public pension funds. However, they also depend on the target firm's governance quality, and especially its use of antitakeover devices, despite the careful target selection process. We address the endogeneity of target selection and proposal success using sample selection models. We conclude that shareholder proposals have nontrivial control benefits, countering recent arguments that they should be restricted by the SEC.