Shareholder Activism By Institutional Investors Evidence From Cal Pers

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  • 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

  • Hypothesis Generation:
  • Rational Shareholder will become active if the expected benefit of activism exceed the expected cost of activism.
  • Expected benefits
  • = 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

  • Redeeming poison-pill
  • Opting out of state law
  • Reincorporation
  • 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

  • CalPERS document,
  • CompuStat,
  • CRSP,
  • Standard & Poors Stock reports,
  • Company Proxy statements, and
  • Dow Jones News retrieval system
  • Probit Regression

10. Results(1)

  • 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

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