Does Shareholder Proxy Access Improve Firm Value?

The following post comes to us from Bo Becker of the Finance Unit at Harvard Business School; Daniel Bergstresser of the Finance Unit at Harvard Business School; and Guhan Subramanian, Professor of Law and Business at Harvard Law School and Professor of Business Law at Harvard Business School.

In our paper, Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge, which was recently made publicly available on SSRN, we use a natural experiment to assess the shareholder wealth implications of shareholder proxy access. We study stock returns on October 4, 2010, when the SEC unexpectedly delayed proxy access for U.S. public companies. The October 4 announcement makes a particularly useful event for empirical work because it was both material and unexpected. We identify firms most likely to be affected by proxy access as those with significant ownership by institutions with a history of attempts to change corporate policy (“activist institutions”).

Abnormal stock returns on October 4 returns were lower for the companies that were most vulnerable to shareholder access, as measured by total activist ownership, the size of the largest activist stake, or the number of activist owners with stakes above 3% of shares outstanding, and for activist ownership stakes with that had been held for a long time (under rule 14a-11, an owner or group of owners with a stake above 3% and held for more than three years would qualify for proxy access). In other words, the value of firms most likely to be affected by proxy access fell when proxy access was removed (the SEC’s decision did not permanently rule out proxy access, but delayed it for at least one proxy season).

The magnitude of this effect is economically significant. Firms that would have been most affected by proxy access, because they were in the top decile of activist institutional ownership, lost 38 basis points of value compared to firms with low activist ownership. In a regression test, each 10% increase in activist ownership is associated with a 55 basis point drop in value on October 4 returns.

Our finding is consistent with the view that shareholder access, as manifested in the SEC’s final Rule 14a-11, improves overall shareholder value. This result also suggests that boards of public corporations can be useful tools for shareholders when they able to influence board appointments. Much policy and academic discussion about boards has focused on board member skills and independence. Our result highlights the importance of the process for nominating and electing directors as a way of mediating shareholder-manager agency conflicts. Adjusting this process offers a regulatory alternative to regulating board composition through formal criteria (such as share of outsiders).

Finally, our findings have policy implications. Section 3(f) of the Securities Exchange Act of requires the SEC to consider whether certain proposed rules “will promote efficiency, competition, and capital formation.” Section 23(a) of the Act prohibits any rulemaking that would unnecessarily or inappropriately burden competition. The Administrative Procedure Act mandates that SEC rulemaking shall not be “arbitrary and capricious.” The findings in this paper suggest that the SEC’s Rule 14a-11 may satisfy the requirements of the Securities and Exchange Act and the Administrative Procedure Act. By extension, the results presented in this paper offer support for that the SEC’s Rule 14a-11.

The full paper is available for download here.

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One Comment

  1. Andrew Clearfield
    Posted Monday, January 10, 2011 at 6:05 pm | Permalink

    I have to confess that, while I like the result, one day’s returns are not a lot to go on.

    It may be that event-driven speculators indeed dumped these shares on the unexpected announcement, but the argument that this provides proof for proxy access adding value would seem to be circular. What this might prove, if the abnormally low returns persisted, is that frustrated expectations (of an event that is assumed to lead to abnormal positive returns) can destroy value. This wouldn’t prove the converse.

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