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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

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