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Shareholder Activism By Institutional Investors Evidence From Cal Pers
 

Shareholder Activism By Institutional Investors Evidence From Cal Pers

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    Shareholder Activism By Institutional Investors Evidence From Cal Pers Shareholder Activism By Institutional Investors Evidence From Cal Pers Presentation Transcript

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