- 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
- 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