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

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

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