Shareholder Activism by Institutional Investors: Evidence from CalPERS

Abstract

This study examines firm characteristics that lead to shareholder activism and analyzes the effects of activism on target firm governance structure, shareholder wealth, and operating performance for the 51 firms targeted by CalPERS over the 1987-93 period. Firm size and level of institutional holdings are found to be positively related to the probability of being targeted, and 72 percent of firms targeted after 1988 adopt proposed changes or make changes resulting in a settlement with CalPERS. Shareholder wealth increases for firms that adopt or settle and decreases for firms that resist. No statistically significant change in operating performance is found. INSTITUTIONAL OWNERSHIP OF DOMESTIC equities has grown rapidly in recent yearsand in 1992 surpassed the 50 percent level of aggregate ownership.1 At the same time, the market for corporate control that was active in the 1970s and 1980s, and that served effectively to discipline managers, has weakened substantially.2 The rise in institutional holdings and corresponding decline of the market for corporate control have focused attention on the role and importance of institutional investors as monitors of corporate management. The recent increase in monitoring by traditionally passive institutional investors has been described as "shareholder activism." For this study, shareholder activism is defined to include monitoring and attempting to bring about changes in the organizational control structure of firms (targets) not perceived to be pursuing shareholder-wealth-maximizing goals.The emergence of shareholder activism raises questions about the practices of activist institutional investors and particularly whether activism is beneficial for shareholders of targeted firms and possibly firms that are not targeted changes to the proxy rules, if more than ten shareholders as a group discussed a company's business, they were required to send information to the other shareholders. This communication restriction was eased with the 1992 proxy reform such that an unlimited number of shareholders can communicate as long as written materials are provided to the SEC. 7 Most information has been obtained from personal meetings with CalPERS officials including the Chief Investments Officer,

Public Choice Economics and Public Pension Plan Funding

“…Public pension plans have used their sizable economic power to become the most active of institutional owners in pressing for improvements in corporate governance and performance (Del Guercio & Hawkins, 1999;Smith, 1996;Useem et al, 1993;Wahal, 1996). Yet studies regarding the performance of public pension plans-using both a long-term measure of performance (plan funding) and short-term measures (plan expenses and plan investment return)-suggest that performance issues are significant in scope.…”

The Impact of Institutional Investors on Firms Accounting Flexibility: Evidence from Jordan

“…In terms of institutional investor influence on the performance of the company, mixed results were documented, Smith M. (1996) concluded a direct correlation between the firm's performance and institutional investors, while Duggal and Millar (1999), Facio and Lasfer (2000) and Mizuno M. (2010) did not support this result, and concluded no statistical evidence that IIP influence the performance of the companies.…”

Stakeholder power and corporate social performance

“…Institutional investors are considered, according to the theory of efficient markets, as rational investors seeking to reduce the inherent risk of their investment and to increase security and the sustainability of their portfolios. Because CSP is presented as a guarantee against the risks incurred by a business, it is in the interest of institutional investors to target businesses that handle properly their relationships with the different stakeholders (Smith, 1996). Thus, CSR activities are considered, by institutional owners, as insurance against the uncertain costs resulting from neglect due to a bad management of interdependencies with powerful stakeholders.…”