Text of Shareholder Activism By Institutional Investors Evidence From Cal Pers
1. Shareholder Activism by Institutional Investors: Evidence from CalPERS (Michael P. Smith ) Journal of Finance (March 1996), Vol. 51(1), pp227-252 Presented by: Deepak A. Pratyush B. Ranajee (PhD 2008-11, Batch-II)IIMT, Hyderabad
2. Objective of the study
To analyze whether shareholder activism acts as a source of monitoring the firms governing structure and its impact on share price.
Financial Characteristics Shareholder Activism Change in Gov. Structure & Performance Change in Shareholder Wealth 3. Rationale for the study
What type of firms are subject to shareholder activism?
Is shareholder activism effective in changing firms governance structure?
Does shareholder activism lead to performance?
4. Reasons to taking CalPERS data?
CalPERS (California Public Employees Retirement System) is regarded as a leader in shareholder activism.
If supporting data is not found regarding effect of shareholder activism on firm control then it will hold good for other activist organization.
5. Flow of the article
Rational Shareholder will become active if the expected benefit of activism exceed the expected cost of activism.
= P(success of target firm) x shareholders private gain.
Literature support for this proposition is given byAdmati et. al. (1992), Ayres and Cramton (1993)
6. Flow of the article
Firm size may affect the likelihood of being targeted.
There should be a negative relation between stockprice performance and probability of being targeted through activism(Martin and Mcconnell, 1991).
Firms with lower Tobins Q will have higher probability of being targeted with shareholder activism(Lang et. al., 1989)
7. Sample for the Study
Activism targets of CalPERS from 1987 to 1993
Total number of target firms = 51
Three types of sample taken
Industry-matched sample (Not targeted)
Potential targets (95 firms)
Firms, insulated from activism(250 firms)
8. Activism Events
Opting out of state law
Prohibition of Repurchase of share above market price
Implementation of Confidential Voting
Creating shareholder advisory committee
Altering board composition
Reducing Executive Compensation
9. Data Collection & Methodology
Standard & Poors Stock reports,
Company Proxy statements, and
Dow Jones News retrieval system
Firm size and Institutional Ownership are positively related to target selection.
However level of inside ownership does not have significant influence in target selection.
Tobin's Q ratio is negatively related to probability of being targeted, but the relationship is moderate.
Prior performance of firms among the bottom 250 is not a significant factor in target selection.
11. Results (2)
Market to book value is not significantly related to target.
Performance related resolution have a higher probability of success than the take over related resolution.
Results also suggest that activism targets have slightly different board composition and more diversified than control firms.
Results of the effect of activism on governance structure indicates that activism influences changes in governance structure.
12. Results (3)
Activism is beneficial to shareholder, if the activist is able to change the control structure of the targeted firms and may be detrimental to shareholder
The result also suggest that the effect of activism are not dependent on target selection criterion, or time period of targeting.
The results do not support the hypothesis that the shareholder activism has a significance impact on a firms operating income, reductions in undistributed cash flow and increases in asset sales.
13. Thank you Presented by: Deepak Agrawal Pratyush Banerjee Ranajee