Investor stewardship

Carleton, Nelson, and Weisbach (1988): “The Influence of Institutions On Corporate Governance Through Private Negotiation: Evidence From TIAA-CREF”

Journal of Finance

• Uses private letters from TIAA-CREF to show that most shareholder activism occurs “behind the scenes” through private negotiations rather than proxy voting
• The effect of activism depends on the issue. Board diversity targeting reduces the stock price; restrictions on blank-check stock issues increase it
• Regardless of the issue, profitability doesn’t change after activism

Becht, Franks, Mayer, and Rossi (2009): “Returns To Shareholder Activism: Evidence From
a Clinical Study of the Hermes UK Focus Fund”

Review of Financial Studies

• Uses private engagement data from Hermes Focus Fund
• Engagements typically involved selling non-core assets, reining in diversification, and replacing the CEO or chair
• Stock returns and profitability improve after engagement

Brav, Jiang, Partnoy, and Thomas (2008): “Hedge Fund Activism, Corporate Governance and Firm Performance”

Journal of Finance

• When an activist hedge fund acquires a 5% stake in a firm, the firm value rises in the short-term, with no long-term reversal
• Profitability, payouts to investors, and CEO turnover all rise
• The results are likely due to activist hedge funds causing these effects, rather than predicting them and buying in anticipation

Brav, Jiang, and Kim (2015): “The Real Effect of Hedge Fund Activism: Productivity, Asset Allocation, and Labour Outcomes” 

Review of Financial Studies

• Hedge fund activism improves plant-level productivity, which stems from higher labour productivity
• Higher labour productivity arises despite hours not rising and wages not falling
• Productivity also improves in plants sold by hedge funds. Such disposals are not asset-stripping, but reallocating assets to buyers who can make better use of them
• Hedge funds target firms with under-performing plants. Similar under-performing plants not targeted by hedge funds don’t recover. So the recovery isn’t simply a bounce-back that would have happened anyway

Brav, Jiang, Ma, and Tian (2019): “How Does Hedge Fund Activism Reshape Corporate Innovation?” 

Journal of Financial Economics

• Hedge fund activism leads to a decline in R&D expenditure, but an improvement in R&D output – the number and quality of future patents
• Some patents are sold, but become more impactful for their new owner
• Some inventors leave, but produce more and better patents at their new employer. Those who stay also become more productive
• Non-technical summary of all three papers

 

Malenko and Shen (2016): “The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design”

Review of Financial Studies

• When Institutional Shareholder Services (ISS) recommend a “No” vote on say-on-pay, voting support is lower. But this doesn’t mean that the ISS caused lower voting support. It could be that poor-quality proposals lead to lower voting support (which would have happened regardless of ISS’s recommendation)
• The paper uses a methodology to tease apart causality. A negative ISS recommendation causes say-on-pay support to fall by 25%
• Non-technical summary

Li (2016): “Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry”

Management Science

• Institutional Shareholder Service (ISS) is a proxy advisor that also provides consulting services to companies, and thus may be conflicted. Glass Lewis is a proxy advisor that does not provide consulting services
• When Glass Lewis entered the market, ISS became more likely to recommend “No” votes.
• The effects were stronger for large firms (which are more likely to be ISS’s clients) and for complex rather than no-brainer votes (where it’s easier to be biased)
• Non-technical summary

Appel, Gormley, and Keim (2016): “Passive Investors, Not Passive Owners.” 

Journal of Financial Economics

• Higher index fund ownership leads to several improvements in governance (more independent directors, fewer poison pills, fewer restrictions on shareholders’ ability to call special meetings, and a lower likelihood of having dual-class shares)
• It also leads to higher profitability and valuations. Likely channel is index funds’ voting power: index fund ownership reduces support for management proposals and increases support for governance-related shareholder proposals
• Shows causation, not just correlation, by comparing companies at the top of the Russell 2000 (which have high index fund ownership, as they are the largest in their index) with companies at the bottom of the Russell 1000 (which have low index fund ownership)

Appel, Gormley, and Keim (2018): “Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism.”

Review of Financial Studies

• Higher index fund ownership is uncorrelated with the frequency of activist campaigns, but is associated with more aggressive campaigns – those where the activist seeks board representation, especially in the form of proxy fights.
• It also increases the likelihood of campaign success, measured by the campaign leading to a settlement with management (and the number of board seats the settlement gives to the activist), takeover defences being removed, and the firm being sold to the activist or a third party. (Prior studies showed these outcomes increase firm value)
• No evidence that these campaigns increase payouts or debt.