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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


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


Rationale for the study

What type of firms are subject to shareholder activism?Is shareholder activism effective in changing firm’s

governance structure?Does shareholder activism lead to performance?


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.


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 by Admati et.

al. (1992), Ayres and Cramton (1993)


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 Tobin’s Q will have higher probability of being targeted with shareholder activism (Lang et. al., 1989)


Sample for the Study

Activism targets of CalPERS from 1987 to 1993Total number of target firms = 51Three types of sample taken

Industry-matched sample (Not targeted) Potential targets (95 firms) Firms, insulated from activism (250 firms)


Activism Events

Redeeming poison-pillOpting out of state lawReincorporationProhibition of Repurchase of share above market priceImplementation of Confidential VotingCreating shareholder advisory committeeAltering board compositionReducing Executive Compensation


Data Collection & Methodology

CalPERS document,CompuStat,CRSP,Standard & Poor’s Stock reports,Company Proxy statements, andDow Jones News retrieval systemProbit Regression


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.


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.


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.


Thank you…

Presented by:

Deepak Agrawal

Pratyush Banerjee

Ranajee