Shareholders and Governance

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Sheraton Ballroom II
Hosted By: American Finance Association
  • Chair: Xavier Giroud, Massachusetts Institute of Technology

Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism

Ian Appel
,
Boston College
Todd Gormley
,
Washington University-St. Louis
Donald Keim
,
University of Pennsylvania

Abstract

We analyze whether the growing importance of passive investors has influenced the campaigns, tactics, and successes of activists. We find activists are more likely to pursue changes to corporate control or influence when a larger share of the target company’s stock is held by passively managed mutual funds. Furthermore, higher passive ownership is associated with increased use of proxy fights and a higher likelihood the activist obtains board representation or the sale of the targeted company. Our findings suggest that the large ownership stakes of passive institutional investors mitigate free-rider problems and ultimately increase the likelihood of success by activists.

Opportunistic Proposals by Union Shareholders

John Matsusaka
,
University of Southern California
Oguzhan Ozbas
,
University of Southern California
Irene Yi
,
University of Southern California

Abstract

Corporate governance reformers hope that giving shareholders more voting rights will improve firm performance, but critics argue that some shareholders, such as labor unions and public pensions, will use their rights to advance private interests. This paper finds that labor unions use shareholder proposals "opportunistically" to influence contract negotiations. We show theoretically that shareholder proposals can be used as bargaining chips to extract side payments from management. Our empirical strategy is based on the observation that proposals have a higher than normal value for unions in contract expiration years, when a new contract must be negotiated. We find that during contract expiration years, unions increase their proposal rate by one-quarter (and by two-thirds during contentious negotiations); nonunion shareholders do not increase their proposal rate in expiration years. Unions are much more likely than other shareholders to make proposals concerning executive compensation, especially during expiration years. Opportunistic union proposals are associated with better wage outcomes for union workers. Union proposals primarily originate from their general funds, not the larger Taft-Hartley pension funds, which have legal barriers to activism. Overall, the evidence suggests a potential downside to enhanced shareholder rights.

Analyst Coverage Network and Corporate Financial Policies

Armando Gomes
,
Washington University-St. Louis
Radhakrishnan Gopalan
,
Washington University-St. Louis
Mark Leary
,
Washington University-St. Louis
Francisco Marcet
,
Washington University-St. Louis

Abstract

This paper shows that sell-side analysts play an important role in propagating corporate financial policy choices, such as leverage and equity issuance decisions across firms. Using exogenous characteristics of analyst network peers as well as the “friends-of-friends” approach from the network effects literature to identify peer effects, we find that exogenous changes to financial policies of firms covered by an analyst leads other firms covered by the same analyst to implement similar policy choices. We find that a one standard deviation increase in peer firm average leverage is associated with a 0.35 standard deviation increase in a firm's leverage, and a one standard deviation increase in the frequency of peers’ equity issuance leads to a 29.6% increase in the likelihood of issuing equity. We show evidence that these analyst network peer effects are distinct from industry peer effects and are more pronounced among peers connected by analysts that are more experienced and from more influential brokerage houses.
Discussant(s)
Maria Guadalupe
,
INSEAD
Ashwini Agrawal
,
London School of Economics and Political Science
Ambrus Kecskes
,
York University
JEL Classifications
  • G3 - Corporate Finance and Governance