Shareholder activism: the effect of shareholder
proposals on target firms
Master Thesis
Duco Rosier – S2522225
Supervisor: Prof. Dr. C.L.M. Hermes
Co-assessor: Dr. C. Laureti
MSc International Financial Management
Rijksuniversiteit Groningen, Faculty of Economics and Business
Date of submission: 08-01-2020
Word count: 18.086
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Abstract
The relationship between shareholder activism and firm performance is a much debated and
researched subject in the field of corporate governance. However, to date, the empirical
results remain inconclusive and show positive, negative, and even insignificant relationships,
which may be explained by the heterogeneity of activists’ demands as well as the divergent
streams of theories used throughout literature. The key objective of this thesis is to contribute
to this debate by using a multifaceted measure of shareholder activism in combination with a
two-way distinction of firm performance. This is done by exploring the effects of filed
executive compensation-related and corporate governance-related shareholder proposals on
firm financial performance and by exploring the effects of filed social/environmental-related
shareholder proposals on firm social performance of the 250 largest U.S. listed firms. Based
on agency, institutional, managerial entrenchment, and business relationship theory, it is
argued that the filing of shareholder proposals will lead to an increased financial and social
performance at target firms. Additionally, a moderating role for foreign institutional
ownership is assessed in this context. By conducting several multiple regression analyses it is
found that all three categories of shareholder proposals have no or even negative effects on
their respective performance dimension, which is contrary to this thesis’ predictions. Also,
against expectations, foreign institutional ownership does not moderate the relationship
between the three categories of shareholder proposals and firm performance. The findings of
this thesis thereby add to the shareholder activism-performance literature and have several
theoretical and managerial implications.
Keywords: firm performance, corporate governance, shareholder activism, shareholder
proposals, foreign institutional ownership
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Table of content
Abstract ..............................................................................................................................................2
List of Tables ......................................................................................................................................5
List of Figures ....................................................................................................................................5
List of Abbreviations ..........................................................................................................................5
1. Introduction ................................................................................................................................6
2. Literature review .........................................................................................................................9
2.1 Theoretical foundations ........................................................................................................... 11
2.1.1 Agency theory and shareholder activism ........................................................................... 11
2.1.2 Institutional theory and shareholder activism.................................................................... 13
2.2 Antecedents of shareholder activism ........................................................................................ 14
2.2.1 Target firm antecedents .................................................................................................... 14
2.2.2 Activist antecedents .......................................................................................................... 16
2.2.3 Environmental antecedents ............................................................................................... 17
2.3 Process and outcomes of shareholder activism ........................................................................ 18
2.4 Hypotheses .............................................................................................................................. 20
2.4.1. Shareholder activism and firm financial performance ...................................................... 21
2.4.2. Shareholder activism and firm social performance ........................................................... 23
2.4.3. The moderating effect of foreign institutional ownership on the shareholder activism -firm
performance relationship .......................................................................................................... 24
2.5 Conceptual model.................................................................................................................... 26
3. Research methodology .............................................................................................................. 27
3.1 Data collection ........................................................................................................................ 27
3.2 Sample .................................................................................................................................... 28
3.3 Measurement of variables........................................................................................................ 29
3.3.1. Independent variables ...................................................................................................... 29
3.3.2. Dependent variables ........................................................................................................ 30
3.3.3. Moderating variable ........................................................................................................ 32
3.3.4. Control variables ............................................................................................................. 33
3.4 Empirical data analysis ........................................................................................................... 34
3.5 Robustness tests ...................................................................................................................... 34
4. Results ...................................................................................................................................... 36
4.1 Test of basic assumptions ........................................................................................................ 36
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4.2 Descriptive statistics ............................................................................................................... 37
4.3 Correlations ............................................................................................................................ 38
4.4 Regression results ................................................................................................................... 40
4.5 Robustness tests results ........................................................................................................... 43
4.6. Regression results with a refined shareholder activism measure ............................................. 45
5. Discussion................................................................................................................................. 48
6. Conclusion ................................................................................................................................ 53
6.1 Theoretical implications .......................................................................................................... 53
6.2 Practical implications ............................................................................................................. 54
6.3 Limitations and future research ............................................................................................... 55
Acknowledgments ............................................................................................................................ 57
References ........................................................................................................................................ 57
Appendices ....................................................................................................................................... 65
Appendix A: Glossary of shareholder proposals ............................................................................ 65
Appendix B: Industry types ........................................................................................................... 67
Appendix C: Preliminary analysis ................................................................................................. 68
Appendix D: Shareholder proposal and industry type frequencies .................................................. 71
Appendix E: Descriptive statistics ................................................................................................. 73
Appendix F: Correlation matrix 2014 ............................................................................................ 75
Appendix G: Regression results robustness test 1 (2014 dataset).................................................... 76
Appendix H: Regression results robustness test 2 (different ROA period 2015) ............................. 78
Appendix I: Regression results robustness test 3 (different ROA period 2014) ............................... 79
Appendix J: Regression results robustness test 4 (ROS 2015) ........................................................ 80
Appendix K: Regression results robustness test 5 (ROS 2014) ....................................................... 81
Appendix L: Regression results robustness test 6 (differentiation of proposal submitters 2015) ...... 82
Appendix M: Regression results robustness test 7 (differentiation of proposal submitters 2014) ..... 84
Appendix N: Regression results using a refined measure of shareholder activism (2015 shareholder
vote %) ......................................................................................................................................... 86
Appendix O: Regression results using a refined measure of shareholder activism (2014 shareholder
vote %) ......................................................................................................................................... 88
Appendix P: Regression results using a refined measure of shareholder activism (ROS shareholder
vote %) ......................................................................................................................................... 90
Appendix Q: Regression results using a refined measure of shareholder activism (ROS shareholder
vote %) ......................................................................................................................................... 91
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List of Tables
Table 1: Descriptive statistics
Table 2: Correlation matrix
Table 3: Regression analysis financial performance
Table 4: Regression analysis social performance
List of Figures
Figure 1: Conceptual model
List of Abbreviations
CSP Corporate social performance
FIO Foreign institutional ownership
ROA Return on assets
ROS Return on sales
SD Standard deviation
SoF Say-on-Frequency
SoP Say-on-Pay
VIF Variance inflation factor
VOC Vereenigde Oostindische Compagnie
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1. Introduction
Dating all the way back to 1622, in the time where the world’s first-ever formally publicly
traded company, the ‘Vereenigde Oostindische Compagnie’ (Dutch East India Company, or
VOC), was being active, the concept of shareholder activism originates. At that time, the
VOC dominated trade with the East Indies and its shares were being traded on the Amsterdam
stock exchange. Although the shareholders of the VOC could easily sell their shares, they did
not have any control rights at all as the VOC never held any shareholders’ meetings
(Gelderblom & Jonker, 2004). The absence of control rights, however, did not hinder the
VOC shareholders to articulate their concerns. Unsatisfied shareholders argued that the
directors managed the company inefficiently and that they used their powers primarily for
self-enrichment. In order to stop this, the complainants demanded more influence in the VOC
(de Jongh, 2011).
Ever since this first form of shareholder activism in the 17th
century, the landscape
underlying it, also called corporate governance, has been evolving. In this landscape, the
balance of power and decision-making between board-directors, executives and shareholders
is subject to many debates. The abovementioned VOC shareholders’ activism action thereby
illustrates the disputes that can arise when ownership and control are separated. These
disputes can take various forms and as such shareholder activism has been targeting corporate
governance and firm financial performance, but also social, political, and environmental
issues (Clark & Crawford, 2012; David, Bloom, & Hillman, 2007; Dimitrov & Jain, 2011).
Especially with the increase in institutional shareholdings in the mid-1980s shareholder
activism really began to rise, as many institutions started to engage in activist efforts to urge
firms into better performance (Denes, Karpoff, & McWilliams, 2017). The relationship
between shareholder activism and firm financial and social performance has since then
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sparked much research interest in corporate governance literature, but empirical evidence on
the exact nature of this relationship remains inconclusive. Some studies have reported that
shareholder activism improves performance (Clark & Crawford, 2012; Cunat, Gine, &
Guadalupe, 2012), while others have found that it leads to negative performance (Johnson &
Greening, 1999; Cai & Walkling, 2011), or not any significant reaction at all (Waddock,
2003; Becht et al., 2009). These mixed results may be explained by the heterogeneity of
activists’ demands, as well as the divergent streams of theories used throughout literature
(Karpoff, 2001). Although scholars have long been aware of these differences, they have had
little consideration for their implications in the methodology of their studies, resulting in the
different performance explanations (Goranova & Ryan, 2014). Individually these studies thus
offer different performance explanations, however, collectively they suggest that shareholder
activism is a complex phenomenon where a distinction should be made between different
types of activism demands. It can, therefore, be argued that this heterogeneity of shareholder
activism should be seen as a multidimensional construct, one in which shareholders voice
their concerns through the filing of varying types of proposals. The study of Karpoff,
Malatesta, & Walkling (1996) makes such a distinction by introducing different types of
shareholder proposals: executive compensation-related proposals, corporate governance-
related proposals, and social/environmental-related proposals.
Even though shareholders can thus voice their concerns via proposals and thereby
potentially influence firm performance, their own antecedents are also important to consider
when explaining the abovementioned relationship. Earlier research, for example, finds that
whether shareholders choose to engage in activism or not is largely determined by their own
characteristics (Ryan & Schneider, 2002; Sikavica & Hillman, 2008). In this sense, an
important characteristic of activists is their salience and negotiating leverage relative to
corporate management as these characteristics allow shareholders to pressurize and monitor
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management more extensively (Kang & Shivdasani, 1995). Only large(r) shareholders possess
these characteristics, especially institutional investors (e.g., banks, pension funds), as they
own large blocks of stock within a firm (Chaganti & Damanpour, 1991). Compared to
domestic institutional investors, foreign institutional investors have the relevant monitoring
characteristics even to a stronger degree, as they are less likely to have business relations with
the local firm (Desender et al., 2016). It can, therefore, be argued that the impact of
shareholder activism on firm performance depends on activist characteristics, where foreign
institutional ownership (FIO) has an especially important role within activism as it enables
activists to realize the inherent performance effects of activism. However, only little research
attention has been given on the possible interaction effects of FIO on the relationship between
shareholder activism and firm performance.
Hence, in order to shine a better light on the mixed results for the relationship between
shareholder activism and firm financial and social performance, this thesis uses a
multidimensional construct of shareholder activism by taking into account three different
types of shareholder proposals as introduced by Karpoff et al. (1996). Additionally, a
moderating role for foreign institutional ownership will be examined with regard to the
shareholder activism-performance relationship, since this has only received little research
attention. This thesis thereby aims to bridge these research gaps by using the following main
research question:
What is the effect of shareholder activism on the financial and social performance of firms
and how is this relationship moderated by foreign institutional ownership of firms?
By examining the unclear shareholder activism-firm performance relationship with a multi-
dimensional construct of shareholder activism combined with the studying of a moderator,
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this thesis contributes to existing shareholder activism literature. Also, important practical
contributions are made by this thesis. As financial performance, and increasingly so social
performance, can be seen as the main goal of firms, new knowledge about how performance
can be improved or influenced is highly useful for both shareholders and managers. This
thesis contributes to this knowledge by showing how activism affects both financial and social
performance.
In order to test the main research question, this paper will use multiple regression
analysis on a sample of firms. In the first part, the existing literature on shareholder activism
and firm financial and social performance is reviewed, as well as research on the influence of
FIO. Based on these key underlying concepts, the hypotheses and the core conceptual
constructs of this research will be elaborated on. In the second part, the research design and
methodology will be explained, including a description of the data. Subsequently, the data is
analyzed in-depth and discussed. Last, the limitations and contributions of the study, as well
as directions for future research, will be examined.
2. Literature review
The concept of shareholder activism has been an evolving concept, especially over the last
few decades. Until the 1970s, the main actors on the shareholder activism stage are individual
investors, also called ‘corporate gadflies’ by the contemporary media (Gillan & Starks, 2007).
In the 1970s, however, this begins to change as activists’ agendas start to include more
socially oriented issues. This marks the beginning of the so-called ‘social activism’ field, a
stream within shareholder activism that focusses on social, environmental, and political
activism that seeks to pressurize firms to change their business practices and thereby thus
their societal impact (Rehbein, Waddock, & Graves, 2004; Sjöström, 2008). Due to this
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stream, the amount of shareholder-initiated proposals slowly starts to increase, but it is not
until the mid-1980s that they really begin to surge (Karpoff et al., 1996). It is at this time that
both the Institutional Shareholder Services and the Council of Institutional Investors is
founded, thereby marking a turning point for institutional activism (Davis & Thompson,
1994; Lipton, 2007). These two associations offer the possibility to pool resources and use
proxy votes to protect the interests of their member investors, including many public pension
funds, and thereby pave the way for the second stream in shareholder activism: the so-called
‘financial activism’ field. This financial stream embodies shareholders' primacy and is
especially focused on governance-based financial activism, thereby attempting to improve
governance structures, maximize shareholder value and making managers more accountable
to the firm’s shareholders (Gillan & Starks, 2000, 2007).
Although the goals of financial and social activism can be seen as theoretically
conflicting - social goals may not be shared by financially driven shareholders, while
enhanced shareholder returns may be viewed by socially driven advocates as being seized at
the expense of other stakeholders (Barnett & Salomon, 2012) - the two streams of activism
often coincide in practice. Shareholders often have multiple interests and demands and they
may advocate for both financial as well as social improvements at target firms (Goranova &
Ryan, 2014). However, in order to explain what shareholder activism’s antecedents,
processes, and outcomes are, theoretical foundations remain essential to understand. These
foundations namely present a systematic way of understanding events, behaviors, and/or
situations.
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2.1 Theoretical foundations
In order to explain the antecedents of the two streams of shareholder activism, two types of
distinct underlying theoretical foundations can be identified from literature. Shareholder
activism is thereby defined as “the use of ownership position to actively influence company
policy and practice. Shareholder activism can be exerted through letter-writing, dialogue with
corporate management or the board, asking questions at open sessions in general meetings,
and through the filing of formal shareholder proposals” (Sjöström, 2008: 142). In this sense,
shareholder activists aim to strive for active dialogue or confrontation when the costs of
activism are outweighed by its benefits (Pozen, 1994). Activist identities can thereby range
from a singly minority investor, frequently called a ‘blockholder’, to institutional investors
with majority stakes.
As mentioned earlier, the emphasis of activist shareholders can be to focus on
financially poorly performing firms, called financial activism, and/or to focus on socially
poorly performing firms, called social activism. The roots of the financial activism stream can
be traced back to the rise of agency theory in explaining the battle for corporate control in the
1980s and onward (Zajac & Westphal, 1995), while the social activism stream is an
ideological successor of the 1960s civil rights movement and can be traced back to
institutional theory (Reid & Toffel, 2009).
2.1.1 Agency theory and shareholder activism
Of the two theories mentioned above, agency theory has been the most widely used one
within corporate governance literature in general and in shareholder activism literature in
particular (Goranova & Ryan, 2014). This theory reasons that due to a separation of
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ownership and control in publicly traded companies an agency problem arises between
principals (the shareholders) and agents (the managers). This agency problem occurs because
these two cooperating parties have different self-serving goals and division of labor.
Specifically, agency theory focusses on the agency relationship, a relationship in which the
principal delegates work and decision-making authority to a certain degree to the agent, who
performs this work. So, in the case of publicly traded firms, the work that is delegated by the
shareholders is the control of their ownership, the firm, to managers. The theory attempts to
describe this relationship by using the metaphor of a contract (Jensen & Meckling, 1976).
Agency theory is interested in resolving two problems that might occur in agency
relationships: (1) a goal difference between the principal and agent where it is difficult or
costly for the principal to actually verify what the agent is doing, resulting in an information-
asymmetry, and (2) the problem of risk sharing that occurs when the principal and agent have
different perspectives on risk. As the unit of analysis is the ‘contract’ governing the
relationship between the principal and the agent, the theory focusses on deciding the most
efficient contract that can regulate the principal-agent relationship (Eisenhardt, 1989). In the
case of publically traded firms, the shareholders thus need to closely monitor and incentivize
managers via structural mechanisms so that the managers will maximize shareholder value in
order to avoid the principal-agent conflict (Beatty & Zajac, 1994). Agency theorists have
presented different solutions for this alignment problem, resulting in many different options,
such as board independence, shareholder right plans, and granting executive stock options,
(Denis & McConnell, 2003).
However, shareholders may experience that these mechanisms are not working
properly for them, or are not in place at all, to such an extent that they come into action to
change this. According to the agency perspective, activists are thus seen as conveyors of
dissatisfaction with corporate governance or firm performance (Becht et al., 2009) or as
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requiring specific actions from managers to improve shareholder value (Gantchev, 2013). By
conveying their dissatisfaction, these activists aim to reduce principal-agent problems.
2.1.2 Institutional theory and shareholder activism
Next to agency theory, another important theory within shareholder activism literature is
institutional theory. Key in institutional theory is the necessity of organizational legitimacy as
this ensures organizational survival. The extent to which organizations are deemed socially
acceptable or legitimate thereby relates to societal norms and expectations (Ashforth & Gibbs,
1990). In order to achieve legitimacy, firms need to show certain behavior that adheres to
these societal norms. In their search for organizational legitimacy, firms often end up with
similar strategies as firms operating in the same environment due to three so-called
‘isomorphic processes’ (DiMaggio & Powell, 1983): (1) coercive pressure (political
influence, e.g., government regulations), (2) mimetic forces (standard responses to
uncertainty, e.g., the copying of newly developed technology), and (3) normative standards
(professionalization of an organizational field, e.g., adoption of ‘best practices’ in an
industry). Each of these three forces thereby leads to an ever more increasing homogenization
of organizational practices within a given organization field because firms that meet the
environment’s expected characteristics receive societal legitimacy and gain access to
resources (Toma, Dubrow, & Hartley, 2005). If a firm, however, decides not to follow these
isomorphic forces it could become illegitimate and would be denied access to resources that it
needs in order to survive.
In sum, there appears to be a very important theoretical assumption in institutional
theory, namely the guidance process of social actors towards social legitimacy. This
preoccupation with social legitimacy is even stronger than economic efficiency and
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shareholder wealth because organizational survival depends on it (Rowley & Moldoveanu,
2003; Scott, 2011). As firms are ingrained within wider society through their operations, by,
for example, their use of natural resources and employment of people, expectations are thus
created on firms by social actors in their surrounding environment to respect shared norms.
According to the institutional perspective, activists are thus seen as conveyers of
dissatisfaction with the social performance of the target firm and require specific actions from
managers to improve this (den Hond & de Bakker, 2007). By conveying their dissatisfaction,
these activists aim to shape and/or change societal norms about corporate social performance
(CSP), which in turn pressurizes firms via the three isomorphic forces to adhere to this.
2.2 Antecedents of shareholder activism
While the abovementioned theoretical foundations of shareholder activism can explain
activists’ financial and/or social motivation to engage in activism, it is important to take a
fine-grained approach that goes beyond this as that helps to fully understand what triggers
shareholder activism. The antecedents of shareholder activism are therefore also essential to
take into account. These antecedents consist of firm, activist, and environmental
characteristics (Ryan & Schneider, 2002).
2.2.1 Target firm antecedents
Research finds that the two kinds of shareholder activists often target firms with the same type
of characteristics. The most consistently tested causes of activism in literature thereby are
firm size and performance. According to the financial activism stream, activists normally
focus on large companies as this enables them to create more value. Large firms are more
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difficult for shareholders to monitor effectively and therefore more prone to agency problems
(Strickland, Wiles, & Zenner, 1996; Del Guercio & Hawkins, 1999). Alternatively, according
to the social activism stream, large firms are more sensitive to challenges to their social
legitimacy than smaller firms due to their greater visibility (Rehbein et al., 2004). Activist
campaigns aimed at large firms have a better chance of attracting public and media attention,
thereby facilitating spillover effects to non-targeted firms that will adopt the reforms
demanded by activists at industry leaders (Ferri, & Sandino, 2009). In terms of performance,
shareholder activists tend to target firms whose stock market performance is suboptimal (e.g.,
Brav et al., 2008; Renneboog & Szilagyi, 2011). The agency problem of free cash flows
theorizes that managers prefer to spend cash on value-decreasing investments instead of
distributing it back shareholders (Jensen, 1986). Firms’ cash holdings draw activists’
attention, especially when they have lower distributions to their shareholders (Klein & Zur,
2009). In contrast to this, social activists choose to focus on targeting firms with good prior
performance. Addressing social concerns diverts managerial time and firm resources away
from short-term shareholder value creation to the interest of long-term value creation
(Tudway & Pascal, 2006). This makes it rational for social activists to target firms that have
slack resources to address social issues (Zietsma & Winn, 2008).
Looking at corporate-governance oriented antecedents, the level of executive
ownership and executive compensation are important target firm antecedents. Executive
ownership can be seen as a substitute for the extent of alignment between managers and
shareholders (Ryan, Buchholtz, & Kolb, 2010). Firms with managers who have more shares
can be seen as more aligned with shareholder interests as these managers have to bear to a
greater extent their own decision-making according to agency theory. Hence, firms with lower
managerial ownership are more likely to be targeted by shareholder activism (Prevost & Rao,
2000; Faleye, 2004). Taking a broader perspective, the social activism stream finds that, in
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terms of ownership concentration, more diffused ownership leads to more constraints to
address social concerns (Judge, Gaur, & Muller‐Kahle, 2010). Minority owners invest less
money in their local communities than majority owners and are therefore inclined to show
less ‘responsible’ ownership (Adams & Hardwick, 1998; O’Rourke, 2003). From the
institutional perspective, this means that firms with less concentrated ownership are likely to
be confronted with more diverse demands compared to firms with more concentrated
ownership. When firms face multiple conflicting demands they are more prone to ignore some
elements, one of these being, for example, social concerns (Child & Tsai, 2005). Therefore,
firms with more concentrated ownership are likely to be targeted by shareholder activism.
Lastly, firms with a misalignment between executive compensation and firm performance
also cause shareholder activism because it represents a lost chance in alleviating the agency
problem (Ertimur, Ferri, & Muslu, 2010; Cai & Walkling, 2011). If managers do not produce
sufficient cash flows to justify their pay, they are likely to be targeted or pressured by activists
to reduce their compensation (Murphy, 2002).
2.2.2 Activist antecedents
Despite the focus of most prior empirical research on firm-level antecedents, the own
characteristics of shareholder activists are also theorized to have an influence in their
engagement in activism (Ryan, & Schneider, 2002; Sikavica, & Hillman, 2008). Considering
the capacity, interests, and salience of activists are therefore important in creating a full
picture of shareholder activism. First, activists’ capacity and interests in engaging in activism
could be decoupled from the target firm’s financial and governance situation. Activism costs
vary greatly, from shareholder proposals that require a minimal $2,000 investment in the firm
(Ertimur et al., 2010) to a price tag of multiple millions for hedge funds activism (Gantchev,
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2013), and to justify its costs activists have to either derive an adequate improvement in
overall shareholder wealth or look for benefits that are not shared by all other shareholders
(Kumar & Ramchand, 2008). Hence, investors’ ability and desire to engage in activism can be
affected by their fund size (a larger fund size allows activists to spread risks and expenses of
activism; see Ryan & Schneider, 2002) and investment horizons (longer investment horizons
allow the spreading of activist’ expenses; see Rubach & Sebora, 2009). Second, shareholders
that possess superior salience and negotiating leverage relative to managers or that have the
ability to gain other shareholders’ support could be more willing to engage in activism
because they expect greater returns on their activism investments (Kang & Sorensen, 1999).
This self-selection would imply that these powerful investors may be more likely to become
activists (Chandler, 2006; Chowdhury & Wang, 2009). Proposals by institutional investors,
for example, have historically received much higher approval rates than those initiated by
individual investors (Proffitt & Spicer, 2006).
2.2.3 Environmental antecedents
The third and last antecedent that provokes shareholder activism is the macro environment. In
the macro environment, changing conditions can either have a direct or indirect effect on
activism. The institutional environment can change due to altering societal norms and
behavior, which can result in new or modified rules in the legal environment (Del Guercio,
1996). Additionally, technological changes, such as improved communication techniques,
have lowered shareholder activists’ costs and ease of engaging in activism (Wessel, 2011).
Next to these direct effects, indirect effects of the macro-environment have also affected the
behavior of managers. Managerial actions are affected by their environment (Hambrick &
Abrahamson, 1995), which in turn influences the relation between corporate governance and
18
shareholder activism (Giroud & Mueller, 2011). Managers may find it easier to observe and
react to shareholder activism at identical firms in their environment, thereby assisting
spillover effects and mimetic isomorphism (Lee & Park, 2009).
2.3 Process and outcomes of shareholder activism
Now that the motivation and triggers of shareholder activists are revealed, the actual process
of activism and its effects on firm-level outcomes can be discussed. The process of activism
starts when shareholders arrive at a point that they become increasingly dissatisfied with their
firm’s policies, actions, and choices. At this point, they can opt for three choices, which have
traditionally been classified as loyalty (hold), exit (trade), or voice (activism) (Davis &
Thompson, 1994). Voicing concerns can be done utilizing a variety of tactics, ranging from
public activism, by for example shareholder proposals, media campaigns, and publicized
letters (Song & Szewczyk, 2003; Reid & Toffel, 2009), to private activism, by for example
private negotiations, phone calls, and letters (Becht et al., 2009; Logsdon & Van Buren,
2009). Especially filing shareholder proposals present shareholders with a cheap and
relatively simple way to present matters to the company's owners (Thomas & Cotter, 2007).
Filed proposals can thereby play an essential role in shaping firm practices by facilitating the
fulfillment of activists’ demands or by sending powerful signals to managers and influence
their actions (Ferri & Sandino, 2009; Hillman et al., 2011).
Combined, the mechanisms outlined above have important implications for firms that
become targeted by shareholder activists. Although shareholder activism has been growing
exponentially over the last decades and is now widespread (Renneboog & Szilagyi, 2011;
Sullivan & Cromwell, 2014), its effectiveness on firm-level outcomes remains questionable.
Throughout literature, there are three competing views on this relationship. First, there is the
19
value-creating view, which sees activist efforts as helping to improve the incentive and
control problems that characterize large diffusely held firms. According to this view,
shareholder activism increases firm social performance (e.g., Guay, Doh, & Sinclair, 2004;
Clark & Crawford, 2012), as well as financial performance (e.g., Brav et al., 2008; Cunat et
al., 2012), the latter one often via a governance-based way. Second, there is the value-
destroying view, which views shareholder activism as an impairment on firm management
and operations because activists neither have the skills nor the experience to improve
managers’ decisions. Due to shareholder interference firm financial performance (e.g., Bizjak
& Marquette, 1998; Cai & Walkling, 2011) and social performance (e.g., Johnson &
Greening, 1999; Prevost & Rao, 2000) are lowered. Lastly, the third view on the effectiveness
of shareholder activism outcomes considers activism as having a negligible impact on
governance-based firm financial performance (e.g., Carleton, Nelson, & Weisbach, 1998;
Becht et al., 2009) and social performance (e.g., Waddock, 2003).
The mixed results on the effectiveness of shareholder activism may be explained by
the heterogeneity of activists’ demands, as well as the divergent streams of theories used
throughout literature (Karpoff, 2001). Although scholars have long been aware of these
differences, they have had only little consideration for their implications in the methodology
of their studies. Consequently, most of the literature on shareholder activism arrives at
varying explanations for the different performance implications of shareholder activism
mentioned above (Goranova & Ryan, 2014). Individually these studies thus offer different
performance explanations, however, collectively they suggest that shareholder activism is a
complex phenomenon, and thus a distinction should be made between different types of
activist’ demands. The process of shareholder activism (filing different shareholder proposals)
in itself, therefore, plays an essential role in determining what firm-level outcomes of
shareholder activism will be. Additionally, what should also be taken into account in this
20
relationship, are the characteristics of activists. The characteristics of activists can namely
influence whether shareholders actually choose to engage in the process of activism or not.
Especially foreign institutional ownership as an activist characteristic may be effective in
realizing the performance effects of shareholder activism because this allows activists to
realize performance effects through salience and extensive monitoring and control (Desender
et al., 2016).
2.4 Hypotheses
The review of the literature relating to shareholding activism reveals that results for the
relationship between shareholder activism and firm financial and social performance are
mixed. Important to note is, however, that these mixed results may be explained by the use of
only one explanatory variable in most studies. Additionally, it becomes clear that the process
of filing shareholder proposals is essential in explaining these two different firm-level
outcomes. Combined, it can be argued that both a multidimensional construct of shareholder
activism as well as a two-way distinction of firm performance outcomes can reasonably
explain the relationship between shareholder activism and firm performance. Therefore, this
study adopts governance-based shareholder proposals in capturing the relationship between
financial shareholder activism and firm financial performance, and social-based shareholder
proposals in capturing the relationship between social shareholder activism and CSP. As there
are many different types of shareholder proposals, each with its own effect on performance, it
is essential to distinguish between them. Karpoff et al. (1996) classify shareholder proposals
21
in different categories: (1) executive compensation, (2) corporate governance, and (3)
environmental/social1.
2.4.1. Shareholder activism and firm financial performance
The first dimension of shareholder activism that influences firm performance is based on
governance-related shareholder proposals. Governance-based types of shareholder proposals
are thereby proposed by shareholders in order to improve the firm’s financial performance
(Gillan & Starks, 2000, 2007). Using the categories introduced by Karpoff et al. (1996), the
first two of these categories are, unsurprisingly, of the greatest interest to financially
orientated shareholder activists (Romano, 2001).
The first category, executive compensation, relates to the alignment of executive
incentives with firm objectives: mechanisms that motivate behavior. Agency theory predicts
that managers are unlikely to act in maximizing shareholder wealth unless it is in their self-
interest to do so (Ertimur et al., 2010). Allowing shareholders to express their opinions and
have a say in executive compensation may reduce the agency costs between executives,
directors, and shareholders, as it would result in increased accountability and communication
between these parties (Davis, 2007). It puts pressure on the executives to improve
performance, given that shareholder proposals with a negative content may have substantial
consequences on the support for the executives within the firm (Fama, 1980). Consequently,
shareholder proposals on executive compensation can result in increased shareholder
incentivizing and monitoring (i.e. more efficient compensation contracts) which add value to
1 While Karpoff et al. (1996) classify shareholder proposals into four categories, I combined their category of
internal corporate governance and external corporate governance to create corporate governance, similar to
related research (Bethel & Gillan, 2002). Additionally, I changed one of their categories name from ‘Other’ into
‘environmental/social’ in this paper, similar to related research (Thomas & Cotter, 2007).
22
the firm by holding executives accountable (Cunat et al., 2015; Deane, 2007). Hence, I
hypothesize:
Hypothesis 1: Filing executive compensation-related shareholder proposals will be positively
related to a firm’s financial performance
The second category, corporate governance, relates to the controls that are used by
shareholders to monitor managers so that these managers become aligned with firm
objectives: mechanisms that constrain behavior. The board of directors thereby is the primary
and dominant corporate governance mechanism that is charged with overseeing executive
decisions (Fama, & Jensen, 1983). In terms of board structure, it is essential that directors are
qualified and, most of all, independent, as these characteristics make directors better monitors
(Vafeas, 1999; Krivogorsky, 2006; Ravina & Sapienza, 2009). Managerial entrenchment
theory predicts that an insider-dominated board, especially one with a CEO that serves a dual
role (he/she is also chairman of the board) is seen as a device for managerial entrenchment as
this kind of board may consolidate power and authority, which can weaken the board's overall
monitoring effectiveness (Solomon, 2007). Additionally, without relevant expertise of
(outside) directors, the board may be ineffective (Dalton & Daily, 1999). Powerful insiders
may be driven by self-interest and unless they are not restricted, they will engage in self-
serving activities that can be harmful to firm performance (Deegan, 2006). Such a self-interest
activity is to place takeover defenses in position that can make hostile takeovers too costly,
and thereby denying shareholders the gains from these transactions (Jarrell, Brickley, &
Netter, 1988). Takeover defenses can be used as means to weaken the takeover market as a
check on the behavior of management, as raising the cost of takeover reduces its probability
(Jarrell & Poulsen, 1987; Bebchuk, Coates & Subramanian, 2002).
23
When a board’s structure can be altered to a board that is more independent and better
qualified, it can promote the shareholders' interests (Brickley & Zimmerman, 2010) and also
remove value-decreasing takeover defenses (Guo, Kruse, & Nohel, 2008). Consequently,
shareholder proposals on corporate governance can result in the de-entrenchment of
management, increased shareholder monitoring (i.e. stronger corporate governance
mechanisms), which increase the target firm performance. Hence, I hypothesize:
Hypothesis 2: Filing corporate governance-related shareholder proposals will be positively
related to a firm’s financial performance
2.4.2. Shareholder activism and firm social performance
The second dimension of shareholder activism that influences firm performance is based on
social-related shareholder proposals. Social-based types of shareholder proposals are thereby
proposed by shareholders in order to improve the firm’s CSP. The third category from
Karpoff et al. (1996), environmental/social, is therefore of the greatest interest to socially
orientated shareholder activists. This category relates to raising awareness, directing attention,
and challenging firms to improve their CSP (Wood, 1991). In comparison to the other
dimension of shareholder proposals, social-based shareholder proposals are often filed with
not only the intent to rally the shareholders of the target firm but also to reach and influence
other stakeholders, such as the firm’s employees and customers. Current and potential
employees may respond in a negative manner when they become aware of shortcomings in a
firm’s CSP through proposals (Turban & Greening, 1997). Regulatory agencies may also be
warned by activist’ proposals and may take them into consideration when designing
regulation. Customers can become aware of issues that can affect their willingness to buy
24
goods from the firm, or they may even start their own campaigns via boycotts (Hoyer &
Maclnnis, 1997). Consequently, shareholder proposals on social/environmental issues can
result in managers becoming alerted to the underlying CSP problems and the need for change,
which leads them to evaluate the possibility of corrective action and to make changes to
improve CSP. Hence, I hypothesize:
Hypothesis 3: Filing environmental and social-related shareholder proposals will be
positively related to a firm’s social performance
2.4.3. The moderating effect of foreign institutional ownership on the shareholder activism
-firm performance relationship
While the above reasoning provides insights into the performance impact of shareholder
activism, it does not incorporate any ownership-level antecedents. However, it is after all the
owners of the firm, the shareholders, who decide to engage in activism. When a firm has a
highly diffused ownership, there is no incentive for any owner to monitor management
because the individual shareholder would have to carry the total monitoring costs, while all
the other shareholders would enjoy the benefits. Because of this, large(r), more salient
shareholders are argued to have sufficient incentives to monitor firms (Kang & Shivdasani,
1995; Noe, 2002). In terms of salient/large shareholders, institutional investors have become
an important participant in equity markets, giving them the potential to influence
management’s activities directly via their ownership and indirectly by trading their shares.
Additionally, due to increasing financial globalization and liberalization, it has become easier
for institutional investors to acquire ownership in firms other than those located in their home-
country (Bekaert & Harvey, 2000). Because of this, equity ownership by foreign institutional
25
investors has been growing, which in turn can have an important impact on the relation
between shareholder activism and firm performance.
Institutional investors have the power to pressurize firms to comply with their needs
regarding performance as they possess monitoring capabilities and negotiating leverage due to
the fact that they commonly own large(r) blocks of stock within a firm (Chaganti &
Damanpour, 1991). Like any other shareholder, they also can directly influence management
using their ‘voice’, by voting on shareholder proposals. Gillan & Starks (2003) highlight the
particular role that institutional investors, especially foreign institutional investors, play in
inducing change in corporate governance worldwide. Foreign institutions often take a more
active stance compared to domestic institutions. As domestic institutions have business
relations with local corporations, they may feel compelled to be loyal to management
according to business relationship theory (Desender et al., 2016). Foreign institutional
investors would, therefore, voice their interests quicker and louder than domestic institutional
investors as they are less likely to have business relations with the firm. This increased
independence increases the ability of foreign institutional investors to monitor the firm. The
monitoring of the firm becomes especially important in the case of shareholder activism via
proposals, as these proposals are non-binding (Thomas & Cotter, 2007). Although proposals
may receive strong support from shareholders, management may decide to not follow-up on
them. However, with greater FIO, the probability that management will follow-up on
proposals is likely to increase due to the stronger, more independent, monitoring capacity of
foreign institutional investors. In turn, this can have a positive effect on performance.
Therefore, firms that are owned to a higher degree by foreign institutional investors
obtain/achieve a larger impact from the different categories of shareholder proposals than
firms with a lower level of FIO. Specifically, for the first dimension of shareholder proposals,
that is governance-related proposals (i.e. executive compensation- and corporate governance-
26
related proposals), firms with higher FIO can achieve higher revenues due to a limitation of
agency problems within that firm resulting from increased monitoring and control activities.
Hence, I hypothesize:
Hypothesis 4a: Higher foreign institutional ownership of firms will positively moderate the
positive effects of both categories of filing governance-related shareholder proposals on a
firm’s financial performance
For the second dimension of shareholder proposals, that is social-related proposals, a higher
FIO of a firm would mean that firms have to increasingly deal with social activists that voice
their concerns quicker and louder (Chappie & Moon, 2005; Oh, Chang, & Martynov, 2011).
In turn, this would mean that other stakeholders can easier become aware of shortcomings in a
firm’s CSP and undertake their own action. Managers would then be alerted to a greater
extent to CSP problems, thus resulting in a stronger perceptiveness to these problems and an
increased need to take corrective actions that would improve CSP. Hence, I hypothesize:
Hypothesis 4b: Higher foreign institutional ownership of firms will positively moderate the
positive effects of filing environmental and social-related shareholder proposals on a firm’s
social performance
2.5 Conceptual model
From the provided theoretical framework and hypotheses a conceptual model can be derived,
as shown in Figure 1. This figure shows the proposed positive relationship between the
independent variables of governance-related shareholder proposals on the dependent variable
27
firm financial performance (H1-H2) as well as the proposed positive relationship between the
independent variable of social-related shareholder proposals on the dependent variable firm
social performance (H3). Additionally, the positive moderating effect of the variable FIO on
the proposed shareholder activism performance relationship is incorporated in the model.
Figure 1: Conceptual model
3. Research methodology
3.1 Data collection
In order to test the presented hypotheses, this section will outline the research methodology.
The previously described shareholder activism-performance relationship and the moderating
28
effects of FIO on this relationship will thereby be studied by a quantitative approach. The
secondary data that is used for this approach comes from several databases. The data for the
independent variables, the three categories of shareholder proposals, is obtained via the
website ProxyMonitor.org, a website managed by the Manhattan Institute, a public,
nonpartisan, independent, free-think tank consisting of scholars. Their database records all
proxy proposals submitted by shareholders of the 250 largest American public companies for
annual shareholder meetings. For the dependent variable firm financial performance as well as
for the moderating variable FIO and all the control variables, data is obtained via a database
called Orbis, which is provided by Bureau van Dijk. This database covers financial, statistical,
market, and corporate governance-related information from publicly traded companies.
Lastly, for the dependent variable firm social performance data is obtained via a database
provided by Thomson Reuters EIKON: ASSET4 ESG.
3.2 Sample
The initial sample of this study focusses on the largest 250 U.S. public companies as ranked
according to their revenue by Fortune magazine. The ranking published in 2015 is used. As
mentioned earlier, activists normally target large companies because they are more difficult
for shareholders to monitor effectively and are more sensitive to challenges to their social
legitimacy (Del Guercio & Hawkins, 1999; Rehbein et al., 2004). Additionally, the U.S.
activist investing market is a mature market with a lot of activity, especially when compared
to other countries, due to its market-oriented governance systems and the dominant role of
shareholders over other stakeholders (Weinstein et al., 2019). Furthermore, U.S. markets and
firms typically have the best data coverage. Taking this into account, a U.S. based sample of
the largest publicly traded firms would make an interesting sample to test. After collecting the
29
data, 240 companies are included to form the final sample2. This is sufficient for a good
sample size given the rule of thumb that a sample should include at least 10 observations per
variable (VanVoorhis & Morgan, 2007).
3.3 Measurement of variables
3.3.1. Independent variables
The literature review reveals that the three different categories of shareholder proposals each
have their own effect on firm performance. Following Karpoff et al. (1996), this study
composes the different categories by grouping individual shareholder proposals into these
categories. First, with regard to the category of executive compensation-related shareholder
proposals, Say-on-Pay (SoP) and Say-on-Frequency (SoF) proposals are used to measure
activism. Second, for the category of corporate governance-related proposals, chairman
independence, director qualification, confidential and cumulative voting, declassify the board,
rescinding poison pill and removal of golden parachutes proposals are applied. Lastly, human
and animal rights, diversity, environmental, gender equality, lobbying and political spending
are utilized for the third category of social/environmental-related proposals. For a more
detailed overview of the different shareholder proposals see Appendix A.
How the exact measurement of shareholder activism should be performed is, however,
debated in literature. The survey study of McCahery, Sautner & Starks (2016) finds that
shareholders most frequently use ‘voice’ in their activist engagement, rather than ‘exit’.
Voicing concerns can be done utilizing a variety of tactics, ranging from public activism, by
for example shareholder proposals, media campaigns, and publicized letters (Song &
2 Out of the 250 firms, 10 firms did not receive a proposal in 2015 and are thus excluded.
30
Szewczyk, 2003; Reid & Toffel, 2009), to private activism, by for example private
negotiations, phone calls, and letters (Becht et al., 2009; Logsdon & Van Buren, 2009).
Especially shareholder proposals present shareholders with a cheap and relatively simple way
to present matters to the company's owners. Although shareholder proposals are non-binding,
they can play a critical role in facilitating the implementation of activists’ demands by
sending powerful signals to management (Hillman et al., 2011). Hence, following previous
research (e.g., Karpoff et al., 1996) I operationalize shareholder activism as the filing of each
of the three identified shareholder proposals categories in the year 2015. In order to be able to
conduct a regression analysis (they can only be run with ratio measured variables and dummy
variables), I dummy code whether or not a proposal is filed to a specific company. Receiving
a proposal receives a one, while not receiving a proposal receives a zero in the data. Important
to note is that while shareholder activism for both the categories corporate governance and
social/environmental–related proposals are measured using the filing of proposals to a target
firm (via a dummy), the category executive compensation-related proposals is measured using
the percentage of votes in favor that filed proposals received from the shareholders in a
shareholders meeting (also done in the study of Thomas & Cotter (2007)). This is done
because almost all the firms in the sample received an executive compensation-related
proposal. Dummy coding would therefore not be a good measure.
3.3.2. Dependent variables
In order to measure firm financial and social performance, two different kinds of metrics are
used. For financial performance return on assets (ROA) is used, whereas for social
performance a combined ESG score is used. Previous studies on shareholder activism usually
measure firm financial performance via one of two different metrics, choosing either market-
31
based measures (e.g., stock returns around announcement dates of shareholder proposals) or
accounting-based measures (e.g., ROA). Market-based measures, however, bring about
substantial event date uncertainty and other problems, which can undermine the ability of an
event study to detect the impact of proposals (Del Guercio & Hawkins, 1999), making an
accounting-based measure much more effective (Del Guercio, Seery, & Woidtke, 2008).
Hence, I operationalize a firm’s financial performance as ROA, which can be calculated by
dividing a firm’s net income by the total value of the firm’s assets at the end of the period (see
formula 1). This measure indicates how efficient a company is in using its assets to generate
earnings. Important to note here is that the effects of shareholder activism are likely to show
up only gradually over time (Karpoff et al., 1996; Del Guercio et al., 2008), making the
adoption of a change in ROA over multiple years necessary (Gillan & Starks, 2007). In order
to fully measure the impact of shareholder activism on ROA, I thus use a measure that takes
into account both prior operating performance and post-activism operating performance.
Therefore, following Karpoff et al. (1996), I calculate ROA one year before the firm receives
a proposal (i.e. 2014) and three years after the received proposal (i.e. 2018) and then measure
the percentage difference between these two. As the outcome of this is a percentage that can
take any value, both positive and negative, this makes it a continuous variable.
Formula (1): ROA =Net income
End of period assets
The other dependent variable, firm social performance will be measured by a combined ESG
score compiled by Thomson Reuters ASSET4. This combined score is an overall company
score based on the reported information by companies from 10 themes (e.g., emissions,
product responsibility, CSR strategy, etc.) categorized in three pillars: the environmental,
social, and governmental pillars. Thomson Reuters discounts the reported scores by
32
companies with a controversies overlay (an ESG performance score based on negative media
stories) as this increases the accurateness of the overall ESG score. This measure is also
commonly used by previous studies (Velte, 2016). Following previous research, a lag of one
year is chosen in order to fully take into account the effects of shareholder activism on firm
social performance (David et al., 2007). The combined score is a number that can range
between 0-100, which makes it a continuous variable.
3.3.3. Moderating variable
As (foreign) institutional investors3 need to be registered in the U.S. with a separate filing (13-
F), they can be identified accordingly. As such, previous studies have used 13-F filings to
identify the involvement of (foreign) institutional investors in firms (Elyasiani & Jia, 2017).
This study uses a similar approach. Following Ferreira & Matos (2008), the moderator will be
measured as the proportional number of shares owned by foreign (other than U.S.)
institutional investors (see formula 2) in the year 2015. As the outcome of this measure is a
percentage which can take any value, both positive and negative, this makes it a continuous
variable.
Formula (2): Foreign institutional ownership =Shares owned by foreign institutional investors
Total outstanding firm shares
3 (Foreign) Institutional investors used in this study are: banks, insurance companies, private equity companies,
hedge funds, venture capital companies, pension funds, foundations/research institutes, public authorities.
33
3.3.4. Control variables
In order to control for the potential influence of other factors on a firm’s financial and social
performance, four control variables are used in this study. First, firm size is controlled for
because this is expected to be related to firm performance. Larger firms can achieve
economies of scale and scope resulting in stronger performance (Thomas & Cotter, 2007).
Firm size is measured in this study as the natural logarithmic value of the firm’s total annual
assets in the year 2015. This measure can take any positive value and is therefore measured as
a continuous variable. Second, financial leverage is used as a control as this allows firms to
use debt in order to acquire additional assets, which can result in higher performance (Karpoff
et al., 1996). As a measure, the ratio in 2015 of total long-term debt divided by shareholder’s
equity is used, which is a continuous variable. Third, the firm’s age might also influence
financial and social performance. As the firm gets older it accumulates knowledge and
experience, which can feasibly influence its performance (Murphy, Trailer & Hill, 1996).
Firm age is measured in this study as the difference in years between the firm’s year of
inception and 2015. This variable is measured as a discrete variable because it can take any
integer value bigger than zero. Last, industry effects are also included as a control variable in
this study as prior research shows that the type of industry the firm operates in influences firm
performance (e.g., Schmalensee, 1985). Industry types were initially categorized using 3-digit
SIC codes, but this obtained over fifty codes. Since this categorization was too detailed for
further statistical analysis, the categorization was scaled to four categories following Cuervo-
Cazurra et al. (2018). These four different industry sectors are (1) natural resource-based
industries; (2) manufacturing industries; (3) service industries; (4) others (see also Appendix
B). As this is not a ratio variable, it is required to create dummy variables. Therefore, the first
34
three4 categories are dummy coded into either a value of one if the firm operates in the
corresponding industry or zero if this is not the case.
3.4 Empirical data analysis
In order to test the suggested hypotheses, IBM SPSS version 24 is used. As the study
examines multiple independent variables to explain two continuous dependent variables, two
separate multiple linear regressions analyses are appropriate to use. Since there are
moderation effects in this study, moderated multiple regressions are used. This requires the
independent variables and the continuous moderator FIO to be mean-centered for the analysis,
as well as the computing of interaction variables (Hayes, 2013).
In case there is missing data for one of the variables, the firm is still included in the
analysis as this method (pairwise deletion) maintains valuable data (Enders, 2010).
3.5 Robustness tests
In order to test the sensitivity of the data and to make sure that the results have sufficient
validity, the regression analyses are first repeated by using data of shareholder proposals filed
in 2014 (combined with the corresponding data for all the other variables as specified in
methodology). Additionally, another period is chosen for ROA change: the difference
between ROA one year before the firm receives a proposal, to one year after the firm received
the proposal. This is done for both the 2014 and 2015 datasets. Also, another accounting-
based measure for the dependent variable financial performance is used for both years’
datasets: return on sales (ROS) (using the same change period as the original ROA measure).
4 The other industries is the baseline industry for the dummy effect
35
ROS is also used in other shareholder activism-performance studies as a robustness test (e.g.,
Del Guercio & Hawkins, 1999), and can be calculated by dividing the MNC’s net income by
net sales (see formula 3). The outcome is a percentage which can take any value, both positive
and negative, making it a continuous variable.
Formula (3): ROS =Net income
Net sales
Finally, to check whether the identity of an activist shareholder has any influence in the entire
process, this study makes a broad classification of the different types of submitters of
shareholder proposals. This is done separately for each of the different categories of
shareholder proposals, except for the category of executive compensation-related shareholder
proposals since almost all the submitters for this category are the same in the obtained data
(i.e. “other”). For corporate governance-related shareholder proposals, proposals filed by
individuals are used, while for social/environmental-related shareholder proposals, proposals
filed by social institutions (i.e. religious institutions, socially responsible investing funds,
foundations) are used. Individual proposal submitters are chosen specifically for corporate
governance-related proposals as it is found in earlier research (Thomas & Cotter, 2007) that
the different types of corporate governance proposals filed by individuals receive, on average,
the most shareholder support compared to corporate governance proposals filed by other types
of submitters, which would thereby arguably lead to the wanted change/improvement in firm
financial performance. Additionally, social institutions are chosen as submitter group for
social/environmental-related proposals because it can be argued that they care for better
social/environmental firm performance and thereby thus engage in more intense campaigns
and monitoring in order to see their proposal bring about the wanted change/improvement. I
dummy code whether or not a specific type of proposal is filed to a company by a specific
36
member of the abovementioned two groups, that is, individuals and social institutions. A firm
that receives a specific type of proposal from the abovementioned classified groups receives a
one (e.g., an individual filing a corporate governance-related shareholder proposal), while a
firm that receives a proposal from another type of activist shareholder in that shareholder
proposal category (e.g., a proposal filed by a labor union in the corporate governance-related
shareholder proposal category), as well as firms that do not receive a proposal at all, receive a
zero in the data. This robustness test is performed for both year’s datasets, 2015 and 2014.
4. Results
4.1 Test of basic assumptions
In order to check for any violations of the assumptions underlying regression analysis, four
basic assumptions are tested before performing a regression analysis. First, the assumption of
normality is assessed by checking for skewness and kurtosis as well as making P-P plots of
the regression standardized residuals. These plots show a linear relationship for the residuals
and therefore the assumption of normality is met. Second, the assumption of multicollinearity
is tested with the variance inflation factor (VIF). All the VIF values are below ten, except for
the control variables manufacturing industries and service industries. However, since these are
dummy coded and used as control variables multicollinearity is not an issue (Field, Miles, &
Field, 2012). Third, the assumption of independent errors should be met for doing regressions.
However, since this study does not use time-series data the errors will be dependent.
Therefore, the assumption of independent errors is met. Last, the assumption of linearity and
homoscedasticity is assessed by evaluating scatterplots with standardized residuals. These
scatterplots show randomly distributed dots, thus proving that there is no pattern and thereby
37
meeting the assumption of linearity and homoscedasticity (Hayes, 2013). Additionally,
several outliers occurred during the data analysis. As these outliers might influence the
dataset, all variables are winsorized at 1% (except the dummies). For details see Appendix C.
4.2 Descriptive statistics
The descriptive statistics are presented in Table 1. Shareholder proposals that are submitted at
the 240 sampled firms are mostly executive compensation-related (231), then corporate
governance-related (63), and least of all social-related (58) (for the specific type of proposal
frequency per category see Appendix D, Table D.1-D.3). Regarding industry type, 28 firms
operate in natural resource-based industries, 78 in manufacturing industries, 129 in service
industries, and four in other industries (see Appendix D, Table D.4).
The data for the 2015 sample shows that the average change in ROA for a firm is .41%
(SD=5.05), which is quite alike to the robustness measure of the average change in ROS
(.58%; SD=7.25), while the average CSP score is 54.98 (SD=16.31). From the independent
variable executive compensation shareholder proposals, it becomes clear that shareholders
highly approve this proposal category, as on average 91.52% of the votes are in favor,
meaning that shareholders would like to see management implementing this proposal
category.
The 2014 sample used for robustness purposes, shows that a firm’s ROA is, on
average, -.59% (SD=5.47), which is again quite alike to the average change in ROS (-.41%;
SD=9.06), while the average CSP score is 54.04 (SD=17.12), meaning that both the kinds of
performance are a bit lower compared to 2015 (see Appendix E). The votes in favor of the
category executive compensation-related shareholder proposal remain relatively the same
(mean=93.04%). All in all, the variables remain almost unchanged.
38
Table 1: Descriptive statistics 2015
Variable N Min Max Mean SD
Dependent variables
ROA change (%) 231 -12.31 13.49 .41 5.05
ROS change (%) 189 -19.51 20.08 .58 7.25
CSP 234 21.27 91.88 54.98 16.31
Independent variables
Ex. compensation SP (%)
231 70.71 99.63 91.52 7.70
Corp. governance SP
(dummy)
240 0 1 .26 .441
Social SP (dummy) 240 0 1 .24 .429
Moderating variable
FIO (%) 235 0 33.20 14.43 6.27
Control variables
Firm size 240 8.40 12.37 10.53 .61
Financial leverage (%) 197 -107.39 411.94 111.03 112.86
Firm age 240 0 165 44.11 36.91
Note: variables are presented in original form and not mean-centered. This table reports descriptive statistics
for all the variables used in this study. All variables, except the dummies are winsorized at the 1% level in both
tails. Presented are the number of observations (N), the mean, minimum (Min), maximum (Max) and standard
deviation (SD) of all the variables for the full sample.
4.3 Correlations
In order to check for the strength and direction of the linear relationship between the variables
a correlation analysis is performed, which is presented in Table 2 (2015 data) and in
Appendix F (2014 data). It can be seen in both datasets that the first two categories of
shareholder proposals (executive compensation and corporate governance) correlate
insignificantly with the change in ROA. This is also the case for the third category of
social/environmental shareholder proposals and CSP. The correlation analysis thereby
indicates that the probability of finding significant results in a multivariate setting is small.
Table 2: Correlation matrix 2015
ROA change CSP
Ex.
Compensation
SP
Corp.
governance SP Social SP FIO Firm size
Financial
leverage Firm age
ROA change 1
CSP .106 1
Ex. compensation SP .010 .135*
1
Corp. governance SP .034 -.048
-.033 1
Social SP -.017 -.089
.005 .172**
1
FIO -.163*
.005 .036 -.012
-.089 1
Firm size -0.070 -.171**
-.089 .274**
.294**
.041 1
Financial leverage .095 .050 .001 .040 -.020 -.028 .066 1
Firm age -.059 .065 -.007 .114 .021 .033 .172**
-.099 1
Note: N=240; p<0.01**, p<0.05* (2-tailed)
4.4 Regression results
The results of the main regression analysis can be found in Tables 3 and 4. As can be seen in
Table 3, six different models are used for the financial performance regression analysis. The
first model analyzes the effects of the control variables on firm financial performance. It can
be seen that none of these variables can explain the dependent variable at a significant level.
In model 2 the independent variable executive compensation-related shareholder
proposals is added in a separate manner to the control variables in order to test hypothesis 1.
The results show that this variable has a small positive (B=.003; p=.966), but insignificant
effect, also when looking at the general regression model 4 (B=.005; p=.950). As both models
do not support hypothesis 1, it can be rejected.
After this, the effect of the independent variable corporate governance-related
shareholder proposals on firm financial performance (hypothesis 2) is tested in model 3. From
Table 3 it becomes clear that the filing of corporate governance-related proposals also has a
positive but insignificant effect (B=.059; p=.433), which is confirmed in model 4 (B=.060;
p=.444). Therefore, both models do not support hypothesis 2, which can thus be rejected.
Model 5 shows that the moderating variable FIO has a negative direct and significant
effect on the dependent variable (B= -.155; p≤0.05). By adding the interaction terms in model
6, it becomes clear that although the variable itself can explain the dependent variable (B= -
.173; p=.035), it does not significantly interact with the two independent variables. Interesting
to note is that for one interaction effect, executive compensation-related shareholder
proposals, the interaction is negative (B= -.073), while for the other interaction, corporate
governance-related proposals it is positive (B=.073). This indicates that executive
compensation-related shareholder proposals seem to negatively interact with FIO, which is
contrary to hypothesis 4A, while corporate governance-related proposals seem to positively
Table 3: Regression analysis 2015
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP .003 (.049) .005 (.049) .011 (.049) .009 (.049)
Corp. governance SP .059 (.887) .060 (.890) .055 (.882) .046 (.887)
Moderating variable
FIO -.155 (.059)** -.173 (.065)**
Interactions
Executive compensation SP X FIO -.073 (.009)
Corp. governance SP X FIO .073 (.178)
Control variables
Firm size -.070 (.620) -.070 (.624) -.087 (.645) -.086 (.648) -.078 (.642) -.056 (.656)
Financial leverage .093 (.003) .093 (.003) .091 (.003) .091 (.003) .087 (.003) .080 (003)
Firm age -.038 (.010) -.038 (.010) -.041 (.010) -.041 (.010) -.037 (.010 -.028 (.010)
Natural resource-based industries .028 (2.793) .027 (2.810) .016 (2.807) .015 (2.824) .007 (.2.797) -.021(2.837)
Manufacturing industries .041 (2.668) .040 (2.693) .020 (2.686) .019 (2.712) .008 (2.687) -.032 (2.720)
Service industries .066 (2.625) .064 (2.644) .050 (2.636) .048 (2.655) ..031 (2.631) -.012 (2.662)
R square .017 .017 .020 .020 .044 .054
Adjusted R square -.016 -.021 -.018 -.023 -.004 -.004
F-statistic .522 .445 .530 .462 .917 .924
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+3)
representing a firm’s net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed
executive compensation-related shareholder proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO
refers to foreign institutional ownership. There are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors
are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
42
Table 4: Regression analysis 2015
Social performance (CSP)
Model 1 Model 2 Model 3 Model 4
Independent variables
Social SP -.022 (2.918) -.021 (2.944) -.026 (2.954)
Moderating variable
FIO .008 (.188) .039 (.210)
Interactions
Social SP X FIO -.072 (.510)
Control variables
Firm size -.192 (1.946)*** -.185 (2.045)** -.186 (2.055)** -.198 (2.088)**
Financial leverage .070 (.011) .069 (.011) .069 (.011) .069 (.011)
Firm age .107 (.033) .106 (.033) .106 (.033) .102 (.033)
Natural resource-based industries .-.194 (8.764) .-.187 (8.886) -.187 (8.910) -.188 (8.916)
Manufacturing industries -.216 (8.370) -.209 (8.430) -.209 (8.453) -.201 (8.464)
Service industries .-.227 (8.236) .-.222 (8.279) -.221 (8.303) -.223 (8.309)
R square .050 .051 .051 .055
Adjusted R square .020 .015 .010 .008
F-statistic 1.642 1.412 1.231 1.176
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the corporate social performance score of firms.
Social SP refers to filed social/environmental-related shareholder proposals. FIO refers to foreign institutional ownership. There are 240 observations.
The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
interact with FIO, which is in line with hypothesis 4A. However, since the effects are not
significant, FIO does not seem to significantly positively moderate the shareholder activism
effects on financial performance and hypothesis 4A needs to be rejected.
Looking at Table 4, four different models are used to perform a CSP regression
analysis. Here, model 1 explores the effects of the control variables. It can be seen that firm
size is the only variable that can explain the dependent variable on a significant level
(p≤0.01). Model 2 then tests the effect of the independent variable social/environmental-
related shareholder proposals. The results show that social/environmental-related shareholder
proposals have a negative insignificant effect (B= -.022; p=.771), thereby rejecting hypothesis
3. Next, in model 3 the direct effects of the moderating variable FIO on CSP are tested. The
evidence shows that this variable has a positive insignificant effect (B=.008; p=.909).
When adding the interaction term in model 4, it becomes clear that there is a negative
(B= -.072) relationship for the moderating effect of FIO on the shareholder activism-CSP
relationship. However, given the fact that the B-coefficient is negative and insignificant, FIO
does not seem to positively moderate the relationship between social/environmental activism
and CSP. Therefore, hypothesis 4b is rejected.
4.5 Robustness tests results
The results for the first robustness test, the 2014 analysis, used to test the sensitivity of the
data, can be found in Appendix G. An important difference when compared to the main
regression analysis of 2015 arises with regard to the effect of the independent variables on
financial performance. Executive compensation-related shareholder proposals in models 2
(B= -.122) and 4 (B= -.124) appear to negatively influence financial performance at a
significant level (p≤0.1), which is the exact opposite of the effect that hypothesis 1 predicted.
44
The other independent variable, corporate governance-related shareholder proposals, also
shows a negative effect (B= -.022) on financial performance, although at an insignificant
level. Looking at the interaction effects in model 6, these still both remain insignificant in the
2014 analysis, thus rejecting hypothesis 4a. Next, the robustness CSP regression of 2014 also
changes in quite some important ways to the main CSP regression of 2015. Although
social/environmental proposals remain to have a negative insignificant effect in both models 2
(B= -.119) and 3 (B= -.113), the effect of these proposals on CSP does become negative
significant in model 4 (B= -.400; p=.025). This means the exact opposite of the prediction that
hypothesis 3 made. The interaction variable of social/environmental proposals with FIO in
model 4 (B=.318; p=.077), on the other hand, shows a positive significant effect, which would
be in line with hypothesis 4b. However, given the negative relation between
social/environmental proposals and CSP in model 4, hypothesis 4b is still rejected.
The second and third robustness tests, using a different period for ROA, can be found
in Appendix H (2015 data) and Appendix I (2014 data). Both regressions are quite similar to
each other but somewhat different from the original ROA period used as the main regression
analysis above. In both the robustness tests, executive compensation-related shareholder
proposals have a negative insignificant effect on the different period of ROA. This, therefore,
rejects hypothesis 1. Also, hypothesis 2 is rejected as the effect of corporate governance-
related shareholder proposals on the different period of ROA is positive, albeit insignificant,
in both years’ datasets. The interaction effect of FIO and executive compensation-related
shareholder proposals in both robustness datasets is negative and insignificant, while for the
other interaction, corporate governance-related proposals, and FIO, it is positive insignificant.
This rejects hypothesis 4a.
The fourth and fifth robustness tests, using ROS instead of ROA to measure financial
performance (see Appendix J for 2015 data; Appendix K for 2014 data), verify most of the
45
previous tests, although the coefficients somewhat change. Both the independent variables in
both years’ ROS regressions show an insignificant relationship with ROS, thereby rejecting
hypotheses 1 and 2. Also, the interactions for the independent variables with FIO indicate an
insignificant effect on ROS, thus rejecting hypothesis 4a.
The sixth and seventh robustness tests, using proposals filed by only specific
shareholder groups, can be found in Appendix L (2015 data) and in Appendix M (2014 data).
The results of both years’ ROA regressions show rather insignificant results, which is also
largely the case for the CSP regressions. Yet, it can be noted that in the 2014 CSP regression
social/environmental-related proposals filed by social institutions seem to have a negative
significant effect on CSP (B=-.118; p≤0.1) in model 2. However, since this result only occurs
in one model in one of both tested years, it should not be given too much attention.
All in all, these robustness tests show interesting results that are somewhat different
from the main regression analysis. Although they thereby offer an important empirical basis
for this study with regard to data sensitivity and validity, their results remain mostly
insignificant. Therefore, it would be interesting to refine the most important measure in the
analysis, that is, the measure for shareholder activism.
4.6. Regression results with a refined shareholder activism measure
In order to refine the shareholder activism measure, this study uses the percentage of votes in
favor of each of the categories of shareholder proposals. This measure is also often used in
other activism studies (e.g., Thomas & Cotter, 2007; McCahery, Sautner & Starks, 2016). The
explanation behind this refined measure is that proposals that receive higher percentages of
votes in favor increase the pressure on management because they are more likely to command
the attention of boards of directors and thus result in implementation. Stronger voting support
46
is likely to urge shareholders backing the proposal in a more intense campaign for its
implementation and attracts greater press coverage, which increases the political costs of
ignoring the vote (Ertimur et al., 2010). Lower levels of voting support, on the other hand, are
consistent with the view that shareholders do not believe the issues raised in the proposal as
important to the firm.
The refined measure is operationalized as the percentage of votes in favor of each of
the three identified shareholder proposals categories in the year 2015 (and also in the year
2014 for a robustness test)5. In the case that a company receives multiple identical proposals
types in a year (e.g., multiple SoP proposals) the average amount of votes in favor of this type
of proposal is taken.
Several regressions are performed using this measure, first for both the years 2015 and
2014 using ROA as the dependent variable, and second for both the years 2015 and 2014
using ROS as the dependent variable. All these conducted regressions thereby show that the
refined measure of shareholder activism makes quite an impact in terms of the significance of
the coefficients. Important to note, however, is that these regressions have a smaller sample
(N≈50) compared to the main regression (N=240) and the robustness tests (N≈240), due to the
use of listwise deletion of missing data. The disadvantage of this smaller sample can be that
the results are somewhat less precise and generalizable, but when comparing the smaller
sample with the larger sample, the descriptive statistics do not differ that much (see Appendix
E). This indicates that the smaller sample is quite comparable to the larger sample and thus
also its results.
First, the results of the regressions that use ROA as a dependent variable can be found
for 2015 in Appendix N and for 2014 in Appendix O. Just as for the very first robustness test,
these analyses produce quite different results compared to the main regression analysis
5 As the outcome of this variable is a percentage it can range between zero and one hundred and is therefore
measured as a continuous variable.
47
presented above, especially regarding the effect of activism on financial performance. Models
2 (2015: B= -.253; p=.055 (2014: B= -.338; p=.016)) and 4 (2015: B= -.267; p=.038 (2014:
B= -.354; p=.014)) show negative significant effects of executive compensation-related
proposals, thereby proving the exact opposite of hypothesis 1. This is also the case for the
negative significant effect of corporate governance-related proposals, which is supported in
models 3 (B= -.249; p=.070) and 4 (B= -.264; p=.048) of the 2015 dataset, thereby also
proving the opposite of hypothesis 2. The interactions from executive compensation-related
proposals and corporate governance-related proposals with FIO in these two analyses remain
the same in both analyses, namely all insignificant, thus rejecting hypothesis 4a. An exception
is the corporate governance shareholder proposal-related interaction with FIO in the
regression analysis of 2014, as this one is negative significant (B= -.407; p≤0.01). Contrary to
the abovementioned opposite effects of activism on financial performance when using a
different measure for activism, the effects of activism on CSP remain almost unchanged when
using the voting percentage robustness measure for both the years 2015 and 2014 and
comparing these with the main analysis, namely insignificant. As this is also the case for the
interaction of social/environmental proposals with FIO, hypotheses 3 and 4b can be rejected.
Second, the tests using ROS in combination with the percentage of votes in favor of
each of the categories of shareholder proposals can be found in Appendix P for 2015 and in
Appendix Q for 2014. Both these tests largely confirm the results mentioned above as found
is that both the independent variables have a negative effect on financial performance
(measured here as ROS), which is significant in 2015, but insignificant in 2014. Again, this is
the opposite of what hypotheses 1 and 2 predicted. In terms of the interactions for these two
tests, they both find insignificant, although varying, effects. An exception is the 2014
analysis, where a negative significant effect is found (B= -.299; p=.054) for the interaction of
FIO with corporate governance-related shareholder proposals.
48
Overall, the robustness tests results, as well as the results from the tests using a
refined measure of shareholder activism, are quite different from the main regression analysis,
although not in the sense of their impact on the hypotheses. Both these differences and
similarities between the robustness tests and the main regression are evaluated in the
subsequent discussion part.
5. Discussion
The main objective of this thesis is to contribute to the debate on shareholder activism effects,
with a special focus on the effect that activism has on firm performance. By examining the
direct effects of three categories of shareholder proposals on both firm financial and social
performance, this thesis expands the knowledge of shareholder activism research. The results
of this study thereby indicate that almost all of the 250 largest U.S. listed firms do encounter
activism, at least in the form of proposals. In turn, the filing of, as well as the voting on, these
proposals generally lead to no or even negative effects on firm financial and social
performance. Additionally, although only sporadically tested in existing activism research,
interactions for foreign institutional ownership with the different proposal types are also
researched within this study. However, overall these do not show a lot of explanatory power.
Ever since the rise of shareholder activism in the mid-1980s, research on the topic has
remained mired in controversy. Despite important pro-shareholder regulatory modifications
over the past three decades, some scholars call for greater managerial accountability to firm
shareholders in order to enhance firm financial performance (Bebchuk, 2005). Nevertheless,
others denounce the view that firms only exist to fill the pockets of shareholders (Welker &
Wood, 2011) or warn that empowering shareholders will only aggravate the problem of
managerial self-serving with the problem of shareholder self-serving (Lan & Heracleous,
49
2010). Yet another view is that corporations are not sufficiently accountable to the societies in
which they operate for their environmental and social impacts (O’Rourke, 2003). Each of
these alternative perspectives has thereby studied individual performance implications of the
activism phenomenon, without examining the mechanisms underlying its different aspects.
Taking a multidimensional construct of shareholder activism, however, can help clarify some
of the complexity of the activism-performance relationship. The multidimensional construct
that this thesis has taken, consisting of executive compensation-related, corporate governance-
related, and social/environmental-related types of proposals, as well as the two-way
distinction of firm performance in financial and social performance, thereby brings together
mechanisms from agency theory, institutional theory, managerial entrenchment theory, and
business relationship theory.
Focusing on the first category of shareholder proposals, executive compensation-
related proposals, the missing and even negative significant explanatory effects found in this
thesis for this type of proposal are in stark contrast with this study’s predictions, but in line
with the results of some other studies (e.g., Cai & Walkling, 2011; Larcker, Ormazabal, &
Taylor, 2011). Where this study namely theorized a positive relationship between shareholder
activism via executive compensation-related proposals on firm financial performance, the
opposite is found. An explanation for these results might be that the filing and voting on
executive compensation-related shareholder proposals do not lead to the effective monitoring
of compensation, but that these proposals rather are an intrusive measure which undermine
the board’s authority. The consequence of undermining the board’s freedom to decide may, in
turn, be value-destroying, since, for example, the board of directors is more informed about
the firm compared to an average shareholder, which would make the board be better placed to
make decisions. Similarly, CEOs and directors might have access to information that should
be withheld from the market. Next to this, given that shareholder proposals are non-binding, it
50
can also be argued that these proposals have no effect on executive or director behavior, and
thus firm financial performance. Although these proposals are a cheap and relatively simple
way to present matters to the firm’s owners, they still have potential costs associated with
them. Legal costs, as well as costs of managing the relationship with investors, for example,
may result in a negative net effect when putting these proposals in place, even though when
they do not have an effect on performance (Cunat, Gine, & Guadalupe, 2015).
The significant negative findings as well as the insignificant findings on firm financial
performance in the regression analyses for the second category of shareholder proposals used
in this thesis, corporate governance-related proposals, is also the opposite of what was
hypothesized. This is in line with some prior research (Del Guercio & Hawkins, 1999; Gillan
& Starks, 2000), where an explanation for the negative results is that the filing and voting on
corporate governance-related proposals tend to undermine board stability and continuity and
thus can impair firm management. Shareholder activists may lack the skills and experience to
improve on managers’ decisions and their attempts to influence these can disrupt the firm’s
operations and degrade performance (Lipton & Rosenblum, 1991). Additionally, corporate
governance-related proposals might also lead to the removal of anti-takeover measures, which
when in place, would allow the board to have enough time and the right perspective to
accurately evaluate bids and solicit competing offers (Koppes, Ganske, & Haag, 1999; Faleye,
2007). Removing these anti-takeover measures could hurt firm performance as they give the
board of directors the ability to either negotiate higher premiums from legitimate acquirers or
ward off inadequate offers. Furthermore, it can again be argued that the non-binding nature of
shareholder proposals might play a role in explaining the insignificant results.
The hypothesized positive effect of filing and voting on the third category of
shareholder proposals, social/environmental-related proposals, on corporate social
performance is not supported in this study as the different conducted tests on their effect
51
overall lead to insignificant results. This is contrary to what prior studies have found: positive
(Johnson & Greening, 1999) as well as negative relationships (David et al., 2007). One
possible explanation for this insignificant effect might be the earlier stated reason that
shareholder proposals can only achieve voluntary change by companies. Proposals are limited
to those who already have the power of ownership and to those who have the extra money and
time to undertake activism. Other less empowered and less vocal stakeholders have to be
content to be represented by benign shareholders. Another explanation for the found
insignificant effects might be that the structure of the shareholder activism process and the
rules themselves currently hold back significant improvements in terms of CSP. The process
of activism, as well as the rules, namely encourages firms to break down desired change into
objectives that can be done step by step. Each act of shareholder activism via a proposal can
only raise a very specific problem instead of a fundamental critique of business practices. As
a consequence, only small changes in CSP at each firm on each single raised proposal issue
can be achieved (O’Rourke, 2003).
In terms of the predicted positive moderating effect of FIO on the relationship between
the first two categories of shareholder proposals - executive compensation-related and
corporate governance-related proposals - and firm financial performance, the regressions
analyses lead to different results. Almost all of these results, however, show a rather
insignificant interaction effect for FIO. When taking a closer look at the results, it can be seen
that the moderating effects of FIO differ quite a lot, as the effects in some analyses show a
positive insignificant effect, and in others a negative insignificant effect. Two analyses even
show a significant negative interaction effect of FIO with corporate governance-related
proposals on financial performance, which is the opposite of what has been hypothesized.
However, as these significant results only occur in two tests, they do not seem to be very
relevant and may be caused due to small variations in the dataset. Therefore, the obtained
52
results for the moderator FIO do not seem to be meaningful as most of the coefficients in this
analysis are too small to add meaning to the relationship. A possible reason for the
insignificance of this moderating effect might be that (foreign) institutional investors have to
make a trade-off between the costs and benefits of actively monitoring their investments.
Institutional investors will therefore not have the same incentive to monitor the activities of
every firm in their portfolios. Due to their heterogeneity, institutional investors’ monitoring
roles are related to institution type, their investment horizon, and their preference for trading
(Chen, Harford, & Li, 2007; Schmidt & Fahlenbrach, 2017). Although this study already
looked at one specific type of institutional investor, foreign institutional investors, a better
measure for this moderator might thus have been to further take into account the
heterogeneity of institutional investors and how their institutional characteristics (e.g., their
investment horizon) might affect the shareholder activism-performance relationship.
Lastly, FIO also does not significantly positively moderate the hypothesized social
shareholder activism-CSP relationship. Just as with the interactions of FIO with executive
compensation-related and corporate governance-related proposals, the interactions with
social/environmental-related proposals also seem to lead to different results, almost all being
insignificant. Again, a possible explanation for the insignificant moderation effects of FIO
might be the heterogeneity of institutional investors’ monitoring roles. Interesting to note is
that the direct effect of FIO on both firm social and financial performance also varies widely,
but that in this case there seems to be a significant direct effect of FIO for about half of the
conducted analyses. In other activism studies, institutional ownership is mostly used as either
an independent or control variable, where it often also has a direct positive effect on
performance.
53
6. Conclusion
By studying the main research question: “What is the effect of shareholder activism on the
financial and social performance of firms and how is this relationship moderated by foreign
institutional ownership of firms?” this thesis contributes to the shareholder activism-
performance literature. The results of this study thereby have several relevant academic and
practical implications.
6.1 Theoretical implications
This study makes three theoretical contributions to shareholder activism-performance
literature. First, this study addresses the prior inconclusive empirical findings with regard to
the shareholder activism and performance relationship by taking a multidimensional construct
of shareholder activism combined with a two-way distinction of firm performance. By taking
this multidimensional construct of shareholder activism and firm performance, differentiation
is made between different aspects of shareholder activism that target firms, which can thereby
explain the activism process as well as its impact better and more thoroughly. The findings
point to the fact that the shareholder activism-performance relationship is a complex one, as
the results range from insignificant to even negative, depending on regression specifications,
and are contrary to this thesis’ predictions. The need, therefore, arises to take into account the
heterogeneity of activists’ demands as well as different underlying theoretical disciplines
when studying the performance effects of shareholder activism. Second, the findings show
that shareholder activism fails to offer strong support for the classic agency theory assumption
that shareholder monitoring will improve firm performance. The homogeneity of shareholder
interests, one of the key premises of agency theory, which assumes that the interests of
54
activist shareholders are aligned with the interests of the remaining shareholders can thus be
challenged given this study’s results. Activists’ heterogeneity undermines the chance that the
interests of a given shareholder activist will be aligned with the interests of the firm’s other
shareholders. Finally, by taking into account differences between shareholders’ ability to
monitor both the activism process and firms in general, this study highlights the
differentiating role that this can play. To study this, an important characteristic of
shareholders, foreign institutional ownership, has been included in this study as this
characteristic can maximize the impact of shareholder activism. Although the results are
insignificant in this study, many other activism studies have only incorporated (foreign)
institutional ownership as either an independent or control variable (e.g., Karpoff et al., 1996;
Thomas & Cotter, 2007; Kang, Luo & Na, 2018). In these studies, (foreign) institutional
ownership does have a significant effect on firm performance, thereby indicating that it is
important in explaining shareholder activism. The impact should, therefore, be set and
interpreted in the right context, possibly by using more extensive measures.
6.2 Practical implications
Next to the theoretical implications, this thesis also has several relevant practical implications,
especially for both managers and shareholders. To begin with, this study shows managers and
shareholders that further shareholder empowerment can be expected to either decrease firm
performance and/or that it does not even have any significant effect on it. Since the financial
performance, and to some extent social performance, can be seen as the main goal of firms,
new knowledge about how this can be affected is very useful. By filing and voting on
proposals, shareholders may thus not impact and/or even hurt their firm’s performance. A
consequence of this implication is that shareholders need to thoroughly think through the
55
content, impact, and need of their activist efforts before filing proposals. Similarly, members
of the board of directors need to keep open communication with disgruntled shareholders and
understand that activists bring varying motivations and agendas to the discussion.
Additionally, another implication from this study, one that is also shared by critics (e.g., Lan
& Heracleous, 2010), is that as shareholders do not owe a fiduciary duty to their portfolio
firms, shareholder activism may be decoupled from responsibility. The none to negative
effects that are found in this study may partly underline this criticism. The question, therefore,
arises in whose interest the public corporations should be managed.
6.3 Limitations and future research
Some limitations should be noted for this thesis. The first limitation is that of the used sample.
The focus on the largest U.S. companies namely makes the sample quite homogenous in
terms of size and nationality. Hence, the sample may rather be representative for very large
and American firms, instead of for firms that are smaller and located in other countries. This
limitation is also quite common in other activism studies, mainly due to limited data
availability of activism in other countries6. However, the focus on these companies might thus
hamper the reliability and generalizability of the results. Second, although the sample is
controlled for industry influences, only four different types of industries are controlled for.
While it is assumed that four categories are sufficient as this is also done in other studies, it
may be over-simplistic. Third, only one form of activism is researched within this study, the
filing and voting on proposals, but there are several other ways through which activists can
express their concerns, such as private negotiations with management and the selling of shares
(see e.g., McCahery et al., 2016). The last limitation present in this study was the needed
6 Although there is one database that has some global activism data, Institutional Shareholder Services (available
in WRDS), non-U.S. data availability is still very limited and has to be handpicked in global studies on activism.
56
merger of two categories of shareholder proposals into one category: corporate governance.
Initially, this category was split into two separate categories: internal and external corporate
governance, which are also used in other activism studies (e.g., Karpoff et al., 1996), but due
to a limited number of data observations, these had to be merged.
Next to the limitations, several recommendations for future research can be derived
from this study. First, a more diverse and global sample of firms targeted by activism could be
used in future studies. Other countries, such as European ones, are attempting to allow more
shareholder activism (e.g., Croci, 2007), and foreign investors based in the U.S. are beginning
to pressurize firms outside the U.S. Second, the multidimensional construct of shareholder
activism could be further expanded by including more activism components (e.g., more
categories of proposals; more forms of activism) in order to paint a more comprehensive
picture of the activism-performance relationship. In terms of categories of shareholder
proposals specifically, it can, for example, be noted that shifts occur in the type of filed
proposals by activists. While external corporate governance-related proposals, such as rescind
poison pill proposals, were very popular and numerous in earlier studies (e.g., Karpoff et al.,
1996; Thomas & Cotter, 2007) compared to other categories, this category had to be merged
with the category internal corporate governance in this study since it had a limited number of
observations. Shifts such as this one might also occur in other categories, thereby potentially
giving need for a re-categorization of proposal types. Finally, although no moderating results
are found in this study regarding FIO, future research needs to discover the effects of
shareholder’s ability to monitor both the activism process and firms in general. It is possible
that some other shareholder characteristics can more powerfully influence activists to choose
different types of activism, which can eventually influence firm performance.
57
Acknowledgments
First of all, I would like to express my gratitude to my supervisor professor Niels Hermes.
Thanks to his insightful and constructive feedback I was able to tackle several problems at
hand that occurred during the process of writing this thesis. Our interesting and thoughtful
discussions on the subject of activism and corporate governance really helped me to gather
and focus my thoughts and provided me with a better ability to look at a subject from different
angles. Second, I would like to thank my dear friends and family for their unconditional
support during my time as a student at the University of Groningen. They really made my
student life and everything around it an unforgettable ride.
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Appendices
Appendix A: Glossary of shareholder proposals
Executive compensation - Say-on-Pay SoP proposals are votes on the level of executive pay and whether this
level reflects the value that a CEO adds to the firm. It can be seen as an
explicit vote of confidence which combines the opinions of all
shareholders into a simple, highly visible metric. SoP can thereby
strengthen shareholder oversight and limit executive compensation
excesses (Cunat et al., 2015).
- Say-on-Frequency SoF proposals allow shareholders to vote on whether they prefer a SoP
vote each year, every two years or every three years. This kind of proposal
can help to increase the frequency by which shareholders are allowed to
vote on executive pay and thereby increase monitoring.
Corporate governance
- Chairman independence A CEO that serves a dual role (he/she is also chairman of the board) is seen
as a device for managerial entrenchment as this kind of board may
consolidate power and authority, which can weaken the board's overall
monitoring effectiveness (Solomon, 2007). Chairman independence
proposals grant shareholders the option to remove CEO duality in their firm which can halt managerial entrenchment and make directors better
monitors (Ravina & Sapienza, 2009; Brickley & Zimmerman, 2010). - Director qualification Without relevant expertise of directors, the board may be ineffective
(Dalton & Daily, 1999). Shareholder proposals on director qualifications
allow shareholders to appoint directors with the necessary qualifications. - Confidential voting A confidential process for proxy voting is designed to eliminate pressure
and potential conflicts of interest between managers and trustees who vote
shares on behalf of other parties. With confidential voting, management
agrees not to view individual proxy ballots unless the election is challenged
(Nelson, 2005). Shareholder proposals on confidential voting can mitigate
conflicts of interest between managers and shareholders. - Cumulative voting Cumulative voting allows shareholders to combine their votes for the
election of the board of directors and cast these votes in any way they
desire. With cumulative voting, the total number of votes a shareholder is
allowed to cast is the number of shares held times the number of directors
up for election. Cumulative voting provides minority shareholders a greater
ability to elect their favored directors (Nelson, 2005). Shareholder
proposals on cumulative voting can lead to better shareholder
representation in the board and thus to better managed firms (Bhagat &
Brickley, 1984). - Declassify the board A classified board is one where the election of the board of directors is
staggered over several overlapping ‘classes’ (typically three). Essentially,
having a classified board makes it more difficult for a successful bidder to
gain effective control over the board and hence the firm. Declassify the
board proposals enable shareholders to express their views on the
performance of all directors at each annual meeting, instead of having to
wait to elect directors at later meetings. This makes directors more
accountable to shareholders and can remove a serious barrier to a hostile
bidder seeking to gain control over a target board (Bebchuk et al., 2002).
- Poison pill Also called shareholder’s rights plans, poison pills are designed to force
potential acquirers to negotiate with the firm’s board of directors. If the
board views the deal as favorable, then the board can redeem the pill.
Otherwise, once the acquiring firm accumulates a certain level of stock, the
pill is ‘triggered’ granting shareholders the right to purchase stock in either
66
company as a substantial discount. Unlike, many other antitakeover
devices, poison pills can be adopted without a shareholder vote. Proposals
on the removal of poison pills can prevent managerial entrenchment
(Malatesta & Walkling, 1988).
- Golden parachutes Golden parachutes, a type of severance contract, compensate managers for
the loss of their jobs resulting from a change in control. It can insulate
managers from the takeover, reduce managerial discipline and raise
takeover costs and likeability (Hall & Anderson, 1997). Removal of golden
parachutes via proposals makes firms more open to pressure from the
market for corporate control.
Environmental/social
- Human rights Shareholder proposals aimed at promoting, improving and ensuring that
firms deal appropriately with the basic rights and freedoms that belong to
every person in the world.
- Animal rights Shareholder proposals aimed at entitling animals to the possession of their
own existence and that their most basic interests, such as the need to
avoid suffering, should be afforded.
- Diversity Shareholder proposals aimed at promoting, improving and ensuring that
firms deal appropriately with diversity in companies. Usually, these type of
proposals wants firms to add disclosures with comprehensive workforce
data, or disclose results of diversity initiatives. Shareholders can have
insufficient information to determine if firms have a diverse workforce or have been successful in expanding diversity into senior roles.
- Environmental Shareholder proposals aimed at promoting, improving and ensuring that
firms deal appropriately with their environment.
- Gender equality Shareholder proposals aimed at promoting, improving and ensuring that
firms deal appropriately with gender differences.
- Lobbying/political
spending
Shareholder proposals aimed at ensuring and promoting that firms disclose
information on the amounts that are spent on lobbying.
67
Appendix B: Industry types
For the control variable industry type, MNCs are classified in one of the following industry
types:
1. Natural resource-based industries: agriculture, fishing, mining, and oil and gas
2. Manufacturing industries: iron, steel, textile, and chemical processing
3. Service industries: transportation, telecommunications, retail, and other services
4. Others: the rest of the firms in the sample
Appendix C: Preliminary analysis
Table C.1:
Test for multicollinearity
2015 2014
Model 4 (ROA) Model 6 (ROA) Model 4 (CSP) Model 4 (ROA) Model 6 (ROA) Model 4 (CSP)
Independent variables Tolerance VIF Tolerance VIF Tolerance VIF Tolerance VIF Tolerance VIF Tolerance VIF
Executive compensation SP .975 1.026 .952 1.051 .953 1.050 .926 1.080
Corp. governance SP .903 1.108 .893 1.120 .938 1.066 .117 8.576
Social SP .856 1.169 .143 7.016
Moderating variable
FIO .809 1.236 .792 1.263 .746 1.340 .817 1.224
Interactions
Executive compensation SP X FIO .885 1.130 .832 1.202
Corp. governance SP X FIO .809 1.236 .117 8.569
Social SP X FIO .748 1.337 .140 7.152
Control variables
Firm size .877 1.140 .838 1.193 .834 1.199 .881 1.135 .869 1.151 .917 1.091
Financial leverage .964 1.037 .959 1.043 .965 1.036 .977 1.024 .961 1.040 .979 1.022
Firm age .934 1.071 .925 1.081 .930 1.075 .927 1.079 .923 1.083 .900 1.111
Natural resource-based industries .169 5.932 .164 6.103 .167 5.986 .173 5.776 .172 5.809 .167 5.976
Manufacturing industries .086 11.649 .084 11.936 .087 11.483 .082 12.218 .081 12.306 .081 12.380
Service industries .079 12.651 .077 12.954 .080 12.540 .076 13.244 .075 13.725 .074 13.747
69
Figure C.1-C.3 Test for homoscedasticity (2015 dataset)
C.1: Model 4 (ROA) C.2: Model 6 (ROA)
C.3 Model 4 (CSP)
70
Figure C.4-C.6 Test for homoscedasticity (2014 dataset)
C.4: Model 4 (ROA) C.5: Model 6 (ROA)
C.6 Model 4 (CSP)
Appendix D: Shareholder proposal and industry type frequencies
Table D.1
Executive compensation SP type
Frequency Percent
Say on Frequency 1 .4
Say on Pay 230 95.8
Total 231 96.2
Table D.2
Corporate governance SP type
Frequency Percent
Chairman independence 40 16.7
Cumulative voting 1 .4
Declassify the Board 2 .8
Golden Parachutes 20 8.3
Total 63 26.2
Table D.3
Social/environmental SP type
Frequency Percent
Animal Rights 1 .4
Environmental 30 12,5
Gender Equality 1 .4
Human Rights 4 1.7
Lobbying 21 8.8
Lobbying and Politic 1 .4
Total 58 24.2
72
Table D.4
Industry type
Frequency Percent
Manufacturing industries
Natural resource-based industries
Other
Service industries
Total
78
28
4
129
240
32.5
11.7
1.7
53.8
100.0
73
Appendix E: Descriptive statistics
Descriptive statistics 2014 dataset
Variable N Min Max Mean SD
Dependent variables
ROA change (%) 248 -14.92 16.44 -.59 5.46
ROS change (%) 208 -20.23 21.43 -.41 9.06
CSP 248 14.18 91.50 54.04 17.12
Independent variables
Ex. compensation SP (%)
250 75.67 99.85 93.04 6.04
Corp. governance SP
(dummy)
250 0 1 .20 .402
Social SP (dummy) 250 0 1 .18 .383
Moderating variable
FIO (%) 246 0 36.35 15.01 6.64
Control variables
Firm size 252 8.40 12.41 10.51 .62
Financial leverage (%) 213 -213.23 340.98 85.89 97.60
Firm age 250 0 164 43.37 36.92
Note: variables are presented in original form and not mean-centered. This table reports descriptive statistics
for all the variables used in this study. All variables, except the dummies are winsorized at the 1% level in both
tails. Presented are the number of observations (N), the mean, minimum (Min), maximum (Max) and standard deviation (SD) of all the variables for the full sample.
74
Descriptive statistics 2015 dataset using % of votes in favor of a shareholder
proposals measure
Variable N Mean SD
Dependent variables
ROA change (%) 55 .55 5,08
ROS change (%) 45 1.23 7.42
CSP 48 53.47 17.41
Independent variables
Ex. compensation SP (%) 55 91.13 7.36
Corp. governance SP (%) 55 29.70 12.06
Social SP (%) 48 17.93 10.41
Moderating variable
FIO (%) 55 14.26 4.68
Control variables
Firm size 55 10.85 .60
Firm age 55 54.55 41.08
Note: variables are presented in original form and not mean-centered. This table reports descriptive
statistics for a subset of the sample. All variables, except the dummies are winsorized at the 1% level
in both tails. Presented are the number of observations (N), the mean and standard deviation (SD) of
all the variables.
Descriptive statistics 2014 dataset using % of votes in favor of a shareholder
proposals measure Variable
N Mean SD
Dependent variables
ROA change (%) 49 -.96 5.56
ROS change (%) 44 -1.40 8.40
CSP 41 52.40 18.65
Independent variables
Ex. compensation SP (%) 49 91.92 6.26
Corp. governance SP (%) 49 30.28 11.63
Social SP (%) 41 15.23 10.61
Moderating variable
FIO (%) 49 13.99 5.36
Control variables
Firm size 49 10.73 .68
Firm age 49 48.00 39.21
Note: variables are presented in original form and not mean-centered. This table reports descriptive statistics
for a subset of the sample. All variables, except the dummies are winsorized at the 1% level in both tails.
Presented are the number of observations (N), the mean and standard deviation (SD) of all the variables.
Appendix F: Correlation matrix 2014
ROA change CSP
Ex.
Compensation
SP
Corp.
governance SP Social SP FIO Firm size
Financial
leverage Firm age
ROA change 1
CSP .033 1
Ex. compensation SP -.107 .031
1
Corp. governance SP -.035 -.007
-.081 1
Social SP -.117 -.079
-.005 -.053
1
FIO -.018*
.070 -.018 -.068
-.061 1
Firm size -0.075 -.127*
-.143*
.172**
.073
.016 1
Financial leverage .091 -.003 -.071 .041 .002 .057 .072 1
Firm age -.128*
.098 .035 .057 .070 .028 .211**
-.029 1
Note: N=240; p<0.01**, p<0.05* (2-tailed)
76
Appendix G: Regression results robustness test 1 (2014 dataset)
ROA regression analysis 2014
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.122 (.064)* -.124 (.064)* -.125 (.064)* -.127 (.065)*
Corp. governance SP -.022 (.969)
-.029 (.966)
-.031 (.969)
.021 (2.758)
Moderating variable
FIO -.026 (.057) -.020 (.066)
Interactions
Executive compensation SP X FIO .009 (.012)
Corp. governance SP X FIO -.056 (.181)
Control variables
Firm size -.056 (.633) -.074 (.636) -.052 (.646) -.069 (.648) -.069 (.649) -.072 (.657)
Financial leverage .084 (.004) .076 (.004) .085 (.004) .078 (.004) .079 (.004) .077 (.004)
Firm age -.108 (.011) -.100 (.011) .-108 (.011) -.100 (.011) -.099 (.011) -.099 (.011)
Natural resource-based industries -.004 (2.923) .005 (2.910) -.001 (2.934) .009 (2.921) .006 (2.930) .005 (2.949)
Manufacturing industries .064 (2.769) .089 (2.761) .072 (2.793) .101 (2.785) .095 (2.797) .097 (2.814)
Service industries .143 (2.731) .178 (2.726) .149 (2.745) .186 (2.740) .182 (2.749) .181 (2.763)
R square .038 .052 .039 .053 .054 .055
Adjusted R square .010 .019 .005 .015 .011 .002
F-statistic 1.336 1.590 1.153 1.407 1.261 1.033
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+3) representing a firm’s net
income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related shareholder
proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There are 250
observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1
77
CSP regression analysis 2014
Social performance (CSP)
Model 1 Model 2 Model 3 Model 4
Independent variables
Social SP -.119 (3.254) -.113 (3.259) -.400 (7.906)**
Moderating variable
FIO .079 (.175) .026 (.190)
Interactions
Social SP X FIO .318 (.519)*
Control variables
Firm size -.135 (1.940)* -.131 (1.933)* -.130 (1.931)* -.118 (1.931)*
Financial leverage .026 (.012) .028 (.012) .024 (.012) .026 (.012)
Firm age .102 (.032) .109 (.032) .106 (.032) .127 (.033)*
Natural resource-based industries -.032 (8.957) -.016 (8.937) -.007 (8.940) -.059 (9.037)
Manufacturing industries .093 (8.487) .064 (8.477) .086 (8.497) .030 (8.528)
Service industries .-.132 (8.370) .-.178 (8.393) -.162 (8.400) -.211 (8.408)
R square .075 .087 .094 .108
Adjusted R square .048 .056 .057 .068
F-statistic 2.759** 2.763*** 2.593*** 2.682***
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the corporate social performance score of firms.
Social SP refers to filed social/environmental-related shareholder proposals. FIO refers to foreign institutional ownership. There are 250 observations. The
other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
78
Appendix H: Regression results robustness test 2 (different ROA period 2015)
ROA regression analysis 2015 (using different ROA period)
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.107 (.044) -.105 (.044) -.101 (.044) -.099 (.045)
Corp. governance SP .110 (.801)
.107 (.799)
.105 (.798)
.100 (.804)
Moderating variable
FIO -.088 (.053) -.109 (.059)
Interactions
Executive compensation SP X FIO -.029 (.008)
Corp. governance SP X FIO .066 (.161)
Control variables
Firm size -.069 (.563) -.077 (.562) -.099 (.582) -.106 (.581) -.102 (.581) -.087 (.595)
Financial leverage .107 (.003) .109 (.003) .102 (003) .104 (.003) .102 (.003) .098 (.003)
Firm age .016 (.009) .015 (.009) .010 (.009) .009 (.009) .011 (.009) .018 (.009)
Natural resource-based industries -.271 (2.534) -.251 (2.532) -.293 (2.534)* -.273 (2.534) -.277 (2.530)* -.288 (2.573)*
Manufacturing industries .059 (2.420) .100 (2.427) .022 (2.425) .063 (2.433) .057 (2.430) .039 (2.466)
Service industries .085 (2.381) .120 (2.383) .056 (2.380) .091 (2.382) .081 (2.380) .061 (2.413)
R square .123 .134 .134 .145 .152 .157
Adjusted R square .094 .101 .100 .106 .109 .104
F-statistic 4.252*** 4.007*** 3.996*** 3.800*** 3.568*** 2.993***
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+1) representing a firm’s
net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related
shareholder proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There
are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1
79
Appendix I: Regression results robustness test 3 (different ROA period 2014)
ROA regression analysis 2014 (using different ROA period)
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.033 (.044) -.030 (.044) -.029 (.044) -.039 (.045)
Corp. governance SP .048 (.658)
.046 (.660)
.050 (.663)
.128 (1.883)
Moderating variable
FIO .062 (.039) .061 (.045)
Interactions
Executive compensation SP X FIO .056 (.008)
Corp. governance SP X FIO -.086 (.124)
Control variables
Firm size -.033 (.430) -.037 (.436) -.042 (.438) -.046 (.443) -.046 (.444) -.054 (.448)
Financial leverage -.004 (.003) -.007 (.003) -.006 (.003) -.008 (.003) -.011 (.003) -.019 (.003)
Firm age -.062 (.007) -.060 (.007) -.062 (.007) -.060 (.007) -.063 (.007) -.063 (.007)
Natural resource-based industries -.315 (1.987)** -.313 (1.992)** -.321 (1.992)** -.319 (1.998)** -.312 (2.006)* -.318 (2.014)**
Manufacturing industries .031 (1.883) .038 (1.889) .013 (1.897) .020 (1.905) .034 (1.914) .034 (1.922)
Service industries .013 (1.857) .022 (1.866) .000 (1.864) .009 (1.874) .019 (1.882) .016 (1.886)
R square .113 .114 .115 .116 .120 .125
Adjusted R square .087 .084 .085 .081 .080 .076
F-statistic 4.335*** 3.735*** 3.778*** 3.316*** 3.028*** 2.561***
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+1) representing a firm’s
net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related
shareholder proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There
are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1
80
Appendix J: Regression results robustness test 4 (ROS 2015)
ROS regression analysis 2015
Financial performance (ROS)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.010 (.071) -.008 (.071) -.003 (.071) .003 (.072)
Corp. governance SP .090 (1.288)
.090 (1.293)
.087 (1.287)
.084 (1.298)
Moderating variable
FIO -.120 (.086) -.149 (.096)*
Interactions
Executive compensation SP X FIO -.005 (.013)
Corp. governance SP X FIO .077 (.260)
Control variables
Firm size -.089 (.903) -.090 (.908) -.113 (.936) -.114 (.941) -.108 (.937) -.095 (.961)
Financial leverage .099 (.005) .099 (.005) .095 (005) .095 (.005) .093 (.005) .090 (.005)
Firm age -.067 (.015) -.067 (.015) .-072 (.015) -.072 (.015) -.069 (.015) -.063 (.015)
Natural resource-based industries .108 (4.064) .110 (4.088) .090 (4.075)* .091 (4.100) .085 (4.083)* .083 (4.153)*
Manufacturing industries .019 (3.882) .023 (3.918) -.012 (3.900) -.009 (3.938) -.017 (3.921) -.023 (3.981)
Service industries .038 (3.819) .042 (3.847) .015 (3.827) .017 (3.855) .004 (3.840) -.005 (3.896)
R square .032 .032 .039 .039 .054 .059
Adjusted R square -.001 -.007 .001 -.005 .004 -.003
F-statistic .960 .820 1.014 .884 1.078 .956
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROS (from t-1 to t+3) representing a firm’s
net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related shareholder proposals.
Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There are 240 observations. The
other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1
81
Appendix K: Regression results robustness test 5 (ROS 2014)
ROS regression analysis 2014
Financial performance (ROS)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.081 (.105) -.083 (.106) -.085 (.106) -.089 (.107)
Corp. governance SP -.031 (1.596)
-.036 (1.597)
-.041 (1.603)
-.295 (4.540)
Moderating variable
FIO -.082 (.095) -.133 (.109)*
Interactions
Executive compensation SP X FIO .045 (.020)
Corp. governance SP X FIO .271 (.298)
Control variables
Firm size -.110 (1.043) -.122 (1.053)* -.104 (1.064) -.115 (1.071) -.115 (1.073) -.108 (1.081)
Financial leverage .068 (.006) .063 (.006) .069 (.006) .064 (.006) .068 (.006) .069 (.007)
Firm age -.142 (.017)** -.136 (.017)* .-142 (.017)** -.136 (.017)* -.132 (.018)* -.128 (.018)*
Natural resource-based industries .057 (4.817) .063 (4.815) .061 (4.834) .068 (4.832) .059 (4.845) .052 (4.855)
Manufacturing industries .134 (4.564) .150 (4.568) .145 (4.602) .164 (4.608) .145 (4.625) .129 (4.633)
Service industries .243 (4.501) .266 (4.512) .251 (4.523) .276 (4.534) .263 (4.545) .260 (4.548)
R square .063 .069 .064 .070 .077 .086
Adjusted R square .035 .036 .031 .033 .034 .034
F-statistic 2.228** 2.105** 1.930* 1.868* 1.810* 1.649*
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROS (from t-1 to t+3) representing a firm’s
net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related shareholder proposals.
Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There are 240 observations.
The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1
82
Appendix L: Regression results robustness test 6 (differentiation of proposal submitters 2015)
ROA regression analysis 2015 (using a differentiation in proposal submitters)
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4
Independent variable
Corp. governance SP .025 (.992) .025 (.982) .025 (.987)
Moderating variable
FIO -.156 (.059)** -.157 (.062)**
Interaction
Corp. governance SP X FIO .002 (.206)
Control variables
Firm size -.070 (.619) -.074 (.626) -.068 (.621) -.067 (.625)
Financial leverage .093 (.003) .094 (.003) .090 (.003) .090 (.003)
Firm age -.038 (.010) -.041 (.010) -.037 (.010) -.037 (.010)
Natural resource-based industries .028 (2.786) .024 (2.799) .016 (2.772) .016 (2.780)
Manufacturing industries .041 (2.661) .034 (2.677) .024 (2.651) .024 (2.659)
Service industries .066 (2.618) .062 (2.627) .045 (2.602) .045 (2.610)
R square .017 .018 .042 .042
Adjusted R square -.015 -.020 -.001 -.006
F-statistic .525 .463 .987 .872
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+3) representing
a firm’s net income divided by end of period total assets. Corp. governance SP refers to filed corporate governance-related shareholder proposals by
individuals. FIO refers to foreign institutional ownership. There are 240 observations. The other industries is the baseline industry for the dummy effects.
Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
83
CSP regression analysis 2015 (using a differentiation in proposal submitters)
Social performance (CSP)
Model 1 Model 2 Model 3 Model 4
Independent variables
Social SP -.035 (3.362) -.034 (3.372) -.036 (3.370)
Moderating variable
FIO .010 (.187) .042 (.201)
Interactions
Social SP X FIO -.090 (.567)
Control variables
Firm size -.192 (1.946)*** -.184 (2.000)** -.185 (2.007)** -.193 (2.014)**
Financial leverage .070 (.011) .071 (.011) .072 (.011) .067 (.011)
Firm age .107 (.033) .103 (.033) .103 (.033) .101 (.033)
Natural resource-based industries -.194 (8.764) -.185 (8.841) -.185 (8.866) -.185 (8.858)
Manufacturing industries -.216 (8.370) -.204 (8.434) -.204 (8.457) -.197 (8.452)
Service industries .-.227 (8.236) .-.221 (8.264) -.220 (8.290) -.220 (8.282)
R square .050 .051 .051 .058
Adjusted R square .020 .015 .010 .012
F-statistic 1.642 1.431 1.248 1.259
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the corporate social performance score of firms.
Social SP refers to filed social/environmental-related shareholder proposals by religious institutions. FIO refers to foreign institutional ownership. There are
240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
84
Appendix M: Regression results robustness test 7 (differentiation of proposal submitters 2014)
ROA regression analysis 2014 (using a differentiation in proposal submitters)
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4
Independent variable
Corp. governance SP .027 (1.191) .027 (1.194) .027 (1.196)
Moderating variable
FIO -.022 (.057) -.014 (.060)
Interaction
Corp. governance SP X FIO -.028 (.237)
Control variables
Firm size -.056 (.633) -.061 (.645) -.061 (.646) -.063 (.650)
Financial leverage .084 (.004) .083 (.004) .084 (.004) .079 (.004)
Firm age -.108 (.011) -.111 (.011) -.110 (.011) -.112 (.011)
Natural resource-based industries -.004 (2.923) -.006 (2.931) -.009 (2.942) -.011 (2.949)
Manufacturing industries .064 (2.769) .056 (2.787) .050 (2.801) .051 (2.807)
Service industries .143 (2.731) .137 (2.742) .134 (2.751) .133 (2.757)
R square .038 .039 .039 .040
Adjusted R square .010 .005 .001 -.003
F-statistic 1.336 1.161 1.024 .923
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+3) representing
a firm’s net income divided by end of period total assets. Corp. governance SP refers to filed corporate governance-related shareholder proposals by
individuals. FIO refers to foreign institutional ownership. There are 240 observations. The other industries is the baseline industry for the dummy effects.
Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
85
CSP regression analysis 2014 (using a differentiation in proposal submitters)
Social performance (CSP)
Model 1 Model 2 Model 3 Model 4
Independent variables
Social SP -.118 (3.752)* -.114 (3.750) -.109 (3.763)
Moderating variable
FIO .082 (.174) .059 (.187)
Interactions
Social SP X FIO .069 (.596)
Control variables
Firm size -.135 (1.940)* -.133 (1.932)* -.133 (1.929)* -.123 (1.953)*
Financial leverage .026 (.012) .025 (.012) .021 (.012) .021 (.012)
Firm age .102 (.032) .110 (.032) .106 (.032) .112 (.033)
Natural resource-based industries -.032 (8.957) -.035 (8.919) -.025 (8.921) -.056 (9.116)
Manufacturing industries .093 (8.487) .045 (8.516) .067 (8.533) .030 (8.664)
Service industries .-.132 (8.370) .-.193 (8.430) -.176 (8.432) -.211 (8.535)
R square .075 .088 .094 .098
Adjusted R square .048 .056 .058 .058
F-statistic 2.759** 2.777*** 2.621*** 2.423**
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the corporate social performance score of firms.
Social SP refers to filed social/environmental-related shareholder proposals by religious institutions. FIO refers to foreign institutional ownership. There
are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
86
Appendix N: Regression results using a refined measure of shareholder activism (2015 shareholder vote %)
ROA regression analysis 2015 (using shareholder votes %)
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.253 (.089)* -.267 (.086)** -.253 (.088)* -.281 (.098)*
Corp. governance SP -.249 (.056)*
-.264 (.054)**
-.313 (.061)**
-.336 (.068)**
Moderating variable
FIO .073 (.156)** .102 (.175)
Interactions
Executive compensation SP X FIO .087 (.022)
Corp. governance SP X FIO -.025 (.010)
Control variables
Firm size -.233 (1.183) -.240 (1.152)* -.304 (1.202)** -.316 (1.162)** -.316 (1.208)** -.325 (1.270)**
Firm age -.090 (.017) -.046 (.017) -.108 (.017) -.062 (.016) -.067 (.017) -.069 (.017)
Natural resource-based industries -.158 (2.045) -.165 (1.990) -.151 (1.998) -.158 (1.932) -.152 (1.958) -.143 (2.007)
Service industries .166 (1.459) .196 (1.428) .207 (1.442) .242 (1.403)* .258 (1.438)* .279 (1.507)*
R square .142 .203 .197 .265 .279 .285
Adjusted R square .075 .124 .117 .175 .172 .142
F-statistic 2.112* 2.554** 2.456** 2.947** 2.598** 1.989*
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+3)
representing a firm’s net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed
executive compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related
shareholder proposals. FIO refers to foreign institutional ownership. There are 56 observations. The other industries is the baseline industry for the
dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
87
CSP regression analysis 2015 (using shareholder votes %)
Social performance (CSP)
Model 1 Model 2 Model 3 Model 4
Independent variables
Social SP .199 (.267) .231 (.274) .203 (.275)
Moderating variable
FIO -.177 (.622) -.161 (.620)
Interactions
Social SP X FIO .196 (.044)
Control variables
Firm size -.126 (6.652) -.098 (6.674) -.164 (7.366) -.235 (7.731)
Financial leverage .220 (.029) .255 (.029) .221 (.030) .222 (.029)
Firm age .060 (.075) .047 (.074) -.004 (.079) .022 (.079)
Natural resource-based industries .153 (6.844) .095 (7.051) .055 (7.274) .064 (7.235)
Service industries .-.002 (6.034) .-.023 (6.023) -.087 (6.521) -.053 (6.553)
R square .076 .110 .129 .161
Adjusted R square -.034 -.020 -.024 -.011
F-statistic 695 .847 .845 .936
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the corporate social performance score of firms.
Social SP refers to the percentage of votes in favor of filed social/environmental-related shareholder proposals. FIO refers to foreign institutional
ownership. There are 48 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses.
***
p≤0.01, **
p≤0.05, *p≤0.1
88
Appendix O: Regression results using a refined measure of shareholder activism (2014 shareholder vote %)
ROA regression analysis 2014 (using shareholder votes %)
Financial performance (ROA)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.338 (.119)** -.354 (.122)** -.349 (.088)** -.279 (.098)**
Corp. governance SP -.024 (.075)
-.094 (.072)
-.082 (.061)
-.079 (.068)
Moderating variable
FIO -.053 (.156) -.093 (.175)
Interactions
Executive compensation SP X FIO -.018 (.022)
Corp. governance SP X FIO -.407 (.010)***
Control variables
Firm size -.084 (1.211) -.109 (1.149) -.092 (1.283) -.138 (1.219) -.146 (1.208) -.133 (1.270)
Firm age -.135 (.022) -.163 (.021) -.136 (.022) -.171 (.021) -.174 (.017) -.165 (.017)
Natural resource-based industries .111 (3.045) .130 (2.885) .111 (3.087) .130 (2.906) .127 (1.958) .201 (2.007)
Service industries .262 (1.743) .280 (1.651)* .257 (1.796) .261 (1.693)* .256 (1.438) .309 (1.507)*
R square .094 .207 .095 .214 .216 .365
Adjusted R square .014 .116 -.008 .104 .083 .218
F-statistic 1.170 2.292* .920 1.948* 1.617 2.487**
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+3)
representing a firm’s net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed
executive compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related
shareholder proposals. FIO refers to foreign institutional ownership. There are 50 observations. The other industries is the baseline industry for the
dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
89
CSP regression analysis 2014 (using shareholder votes %)
Social performance (CSP)
Model 1 Model 2 Model 3 Model 4
Independent variables
Social SP -.147 (.338) -.120 (.339) -.097 (.352)
Moderating variable
FIO .195 (.582) .170 (.611)
Interactions
Social SP X FIO -.094 (.061)
Control variables
Firm size -.139 (7.746) -.113 (7.947) -.054 (8.238) -.075 (8.527)
Financial leverage .131 (.028) .164 (.029) .179 (.029) .145 (.031)
Firm age .182 (.080) .195 (.081) .192 (.081) .187 (.082)
Natural resource-based industries -.720 (19.804) -.593 (20.920) -.599 (20.833) -.618 (21.122)
Manufacturing industries -.801 (20.148) -.738 (20.512) -.683 (20.507) -.712 (20.854)
Service industries .-.801 (20.386)* .-.752 (20.710) -.733 (20.635) -.745 (20.900)
R square .130 .145 .178 .185
Adjusted R square -.024 -.037 -.028 -.052
F-statistic .843 .797 .863 .780
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the corporate social performance score of firms.
Social SP refers to the percentage of votes in favor of filed social/environmental-related shareholder proposals. FIO refers to foreign institutional
ownership. There are 41 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses.
***
p≤0.01, **
p≤0.05, *p≤0.1
90
Appendix P: Regression results using a refined measure of shareholder activism (ROS shareholder vote %)
ROS regression analysis 2015 (using shareholder vote %)
Financial performance (ROS)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.286 (.156)* -.300 (.149)** -.296 (.151)* -.312 (.166)*
Corp. governance SP -.306 (.106)**
-.319 (.102)**
-.336 (.109)**
-.367 (.116)**
Moderating variable
FIO .054 (.253) .171 (.298)
Interactions
Executive compensation SP X FIO .058 (.035)
Corp. governance SP X FIO -.184 (.022)
Control variables
Firm size -.244 (2.579) -.176 (2.572) -.304 (2.528)* -.236 (2.490) -.216 (2.701) -.163 (2.810)
Financial leverage .060 (.011) .022 (.011) .114 (011) .077 (.010) .075 (.010) .065 (.011)
Firm age -.209 (.029) -.149 (.029) .-178 (.028) -.114 (.028) -.113 (.028) -.080 (.029)
Natural resource-based industries .096 (3.206) .057 (3.138) .130 (3.101) .091 (3.003) .093 (3.045) .097 (3.083)
Service industries .121 (2.595) .188 (2.574) .178 (2.532) .250 (2.489) .260 (2.556) .324 (2.729)*
R square .173 .242 .255 .331 .333 .362
Adjusted R square .067 .122 .137 .204 .184 .174
F-statistic 1.630 2.012* 2.163* 2.612** 2.244** 1.926*
This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROS (from t-1 to t+3)
representing a firm’s net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive
compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related
shareholder proposals. FIO refers to foreign institutional ownership. There are 45 observations. The other industries is the baseline industry for the
dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
91
Appendix Q: Regression results using a refined measure of shareholder activism (ROS shareholder vote %)
ROS regression analysis 2014 (using shareholder vote %)
Financial performance (ROS)
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Independent variables
Executive compensation SP -.232 (.200) -.250 (.203)* -.252 (.203)* -.198 (.198)
Corp. governance SP -.093 (.112)
-.132 (.111)
-.170 (.114)
-.210 (.114)
Moderating variable
FIO .155 (.260) .247 (.319)
Interactions
Executive compensation SP X FIO .126 (.046)
Corp. governance SP X FIO -.299 (.016)*
Control variables
Firm size -.206 (2.355) -.211 (2.309) -.232 (2.471) -.247 (2.415) -.221 (2.454) -.168 (2.426)
Financial leverage .046 (.015) .067 (.015) .041 (.015) .061 (.015) .066 (.015) .091 (.015)
Firm age -.263 (.035) -.293 (.035)* .-268 (.036) -.302 (.035)* -.294 (.035)* -.263 (.035)
Natural resource-based industries .200 (4.565) .214 (4.484) .199 (4.605) .215 (4.502) .224 (4.513) .278 (4.408)*
Service industries .191 (2.772) .190 (2.718) .174 (2.838) .166 (2.771) .186 (2.795) .279 (2.886)
R square .170 .223 .178 .238 .258 .357
Adjusted R square .061 .097 .044 .090 .089 .162
F-statistic 1.556 1.769 1.331 1.605 1.522 1.834*
This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROS (from t-1 to t+3)
representing a firm’s net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive
compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related
shareholder proposals. FIO refers to foreign institutional ownership. There are 44 observations. The other industries is the baseline industry for the
dummy effects. Standard errors are in parentheses. ***
p≤0.01, **
p≤0.05, *p≤0.1
92