Now that proxy season is finally winding down, I had a few minutes to take a quick glance at recent research reported on SSRN. Below I am simply including a few citations and abstracts of studies that might be useful for shareholder advocates in the U.S. I’m sure I included some that are strictly academic and missed many more that would be useful. I would welcome guest posts on such research from authors, critics or other interested parties. Please contact me via e-mail or by leaving comments below.
Bernard Sharfman
Research on Activism
Sharfman, Bernard S., A Theory of Shareholder Activism and Its Place in Corporate Law (June 11, 2015). Tennessee Law Review, Vol. 82, No. 4, 2015.
Offensive shareholder activism (more commonly known as hedge fund activism) can be understood as a corrective mechanism in the governance of a public company. The legitimacy of offensive shareholder activism as a corrective mechanism is based on numerous empirical studies that have found this type of activism to be both wealth enhancing for shareholders and performance enhancing for the target companies. A non-empirical argument can also be made in support of offensive shareholder activism that focuses on the ability of the board of directors to act as impartial arbitrator deciding between the advices provided by executive management and the activist hedge fund.
Recognizing the value of offensive shareholder activism in the decision making of a public company allows for the following theory of shareholder activism: Shareholder activism is a valuable asset in and of itself if the purpose of such activism is to correct managerial inefficiencies. This new theory is built on the foundation of Henry Manne’s market for corporate control.
The implications for corporate law are significant. If corporate law does not recognize offensive shareholder activism as a corrective mechanism, then the benefits of such activism in terms of enhancing the managerial efficiency of public companies and increasing shareholder wealth may become significantly reduced. To facilitate this recognition, this Article provides new thinking on how Delaware’s Unocal test and Blasius standard of review should be applied by the Courts when the Board takes action to minimize the influence of activist hedge funds. Under both standards of review it is argued that corporate law should always take a skeptical view of any Board action taken to directly or indirectly mitigate the influence of this type of activism. This approach is not about shifting decision making authority from the Board to activist hedge funds, but simply putting limits on the Board’s ability to use the legal system to thwart the influence of hedge fund activism in a public company’s decision making process.
Lucian A. Bebchuk
Bebchuk, Lucian A. and Brav, Alon and Jiang, Wei, The Long-Term Effects of Hedge Fund Activism (June 2015). NBER Working Paper No. w21227.
We test the empirical validity of a claim that has been playing a central role in debates on corporate governance — the claim that interventions by activist hedgefunds have a negative effect on the long-term shareholder value and corporate performance. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data. We find no evidence that activistinterventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Our findings have significant implications for ongoing policy debates.
Research on Director Elections
Vyacheslav Fos
Fos, Vyacheslav and Li, Kai and Tsoutsoura, Margarita, Do Director Elections Matter? (May 23, 2015).
Using a hand-collected sample of more than 30,000 directors nominated for election over the period 2001-2010, we construct a novel measure of director proximity to elections — Closeness-to-election. We find that the closer a director is to her next election, the higher is CEO turnover-performance sensitivity. Each year closer to director elections is associated with a 23% increase in CEO turnover-performance sensitivity. Three tests support a causal interpretation of the results. First, when we require directors to have a minimum tenure of three years, there is no material change in the results, suggesting that the timing of when directors join their boards is unlikely to drive the results. Second, we find similar results when we use director Closeness-to-election on other boards as a measure of proximity to elections. Third, when we restrict the analysis to firms with unitary boards, there is no material change in the results, suggesting that director self-selection into firms with staggered boards does not drive the results. Cross-sectional tests suggest that, when other governance mechanisms are in place, CEO turnover-performance sensitivity is affected to a lesser extent by Closeness-to-election. We conclude that director elections have important implications for corporate governance.
Renee Aggarwal
Research on Governance Mandates
Arron Bernstein
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