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E-MailThe following post comes to us from Jonathan Cohn of the Department of Finance at the University of Texas at Austin, Stuart Gillan of the Department of Finance at Texas Tech University, and Jay Hartzell of the Department of Finance at the University of Texas at Austin. Recent discussion papers issued by the Program’s faculty on the subject of proxy access include Private Ordering and the Proxy Access Debate, The Harvard Law School Proxy Access Roundtable, and Does Shareholder Proxy Access Improve Firm Value?
In the paper, On the Optimality of Shareholder Control: Evidence from the Dodd-Frank Financial Reform Act, which was recently made publicly available on SSRN, we use three events involving the adoption of the SEC’s “proxy access” rule in 2010 as natural experiments to test the effects of allocating more direct control to shareholders on firm value. Of particular importance, all three events contained information that was plausibly surprising to the market. We use information about proposed changes to specific aspects of the rule, along with variation in stock ownership by known activist institutional investors, to identify the impact of shocks to control rights on shareholder value.
Our evidence suggests that reforms allowing greater shareholder control (via increased proxy access) are associated with increases in firm value for those firms with shareholders who were more likely to take advantage of that access. Furthermore, variation in market responses based on firm size and the timing of ownership positions provides further evidence that these associations are causal in nature. Overall, the events related to proxy access as stipulated in the Dodd-Frank Wall Street Reform and Consumer Protection Act imply that for many firms, at least those with active shareholders, the balance of power has been tilted too far toward management from a shareholder-value-maximization perspective.
We also examine patterns in institutional ownership among the largest holders and by known activists, along with the history of those positions, both in a mid-2010 cross section and prior to proxy contests that were initiated since 1999 (but without a proxy access rule in place). Our interest is the extent to which a few large institutions could join together (perhaps with a known activist acting as a catalyst) to launch a proxy contest while taking advantage of the new rules which require a three-percent-for-at-least-three-years ownership requirement. Examining historical ownership prior to proxy contests suggests that the three-year holding requirement would have been a binding constraint in the previous contests.
Furthermore, activist investors have fairly high portfolio turnover, as do other institutional investors. This suggests that while the rule changes (if implemented) might represent a windfall gain of control rights for some institutional investors, many of their holdings were formed too recently to be affected in the near term. Thus, if and when proxy access is finally enacted, it will be interesting to observe whether we see changes in the trading behavior of institutional investors (especially activists), as they seek to capitalize on their increased control.
The full paper is available for download here.
