فعالیت هزینه های سهامداران : شواهدی از یک مدل تصمیم گیری متوالی
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|23261||2013||22 صفحه PDF||سفارش دهید||17634 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 107, Issue 3, March 2013, Pages 610–631
This paper provides benchmarks for monitoring costs and evaluates the net returns to shareholder activism. I model activism as a sequential decision process consisting of demand negotiations, board representation, and proxy contest and estimate the costs of each activism stage. A campaign ending in a proxy fight has average costs of $10.71 million. I find that the estimated monitoring costs reduce activist returns by more than two-thirds. The mean net activist return is close to zero but the top quartile of activists earns higher returns on their activist holdings than on their non-activist investments. The large-sample evidence presented in this paper aids in understanding the nature and evolution of activist engagements.
Does shareholder activism generate positive net returns for the activist? Answering this question will help us evaluate the potential for activism to mitigate agency costs due to the separation of ownership and control. Activist shareholders occupy an important “middle ground” between internal governance by blockholders and the board of directors and external governance by the market for corporate control. As a result, the presence of an activist can be crucial for the proper functioning of a firm's corporate governance system. Several recent studies on hedge fund activism have shown that activists generate significant abnormal returns both in absolute terms and in comparison to non-activist investing.1Brav, Jiang, Partnoy, and Thomas (2008) report that the average hedge fund activist in 2001–2006 earned a 14.30% higher return than the size-adjusted value-weighted portfolio of stocks. Klein and Zur (2009) compare the hostile activist campaigns of hedge funds to those of other entrepreneurial activists, and find that the market reacts more favorably to hedge fund activism. Clifford (2008) demonstrates that hedge funds earn significantly higher holding period returns from activist investing than from their passive holdings. Becht, Franks, Mayer, and Rossi (2008) show that the activist investments of the U.K. Hermes Focus Fund significantly outperform the market. Do these substantial returns cover the costs of executing an activist campaign? In addition to unobservable costs such as the time and effort of negotiating with a target, an activist bears disclosure, legal and other fees of hiring proxy advisors, corporate governance experts, investment banks, public relations, and advertising firms. The existing literature on shareholder activism lacks a reliable measure for these costs and ignores them in the calculation of activist returns. Consequently, prior work may have overestimated the returns generated by activism. A shareholder's incentives to actively monitor are determined by a trade-off between the private costs of monitoring, which are fully internalized by the activist, and the public benefits of monitoring, which are shared among all firm shareholders (Grossman and Hart, 1980 and Shleifer and Vishny, 1986). The theoretical literature has emphasized the importance of monitoring costs in determining this incentive trade-off.2 However, the empirical literature has faced some challenges in measuring the cost function of an activist shareholder. The first challenge has been finding the right institutional setting to analyze an activist's incentive trade-off. Most earlier work focuses on pension funds, mutual funds, and labor unions and shows that these institutional monitors are severely restricted by regulatory rules and conflicts of interest.3 More recent studies of hedge fund activism (see Kahan and Rock, 2007, Gillan and Starks, 2007 and Yermack, 2010) have contrasted hedge funds to other institutional activists. Hedge funds are arguably better positioned to be active monitors because they suffer from fewer conflicts of interest, face fewer regulatory restrictions, and have a better-aligned incentive structure. A second challenge in measuring the costs of activism has been the lack of empirical data. Most evidence about monitoring costs is anecdotal and limited to proxy solicitations—the most public activist approach. Stephen M. Bainbridge of the University of California Los Angeles (UCLA) School of Law estimates the costs of a proxy contest at $1.8 million based on a survey conducted in the late 1980s but points out that “costs almost certainly are much higher today.” Hedge fund activists estimate proxy costs at “upwards of $10,000,000.”4 However, most activist campaigns rely on less confrontational approaches such as informal demand negotiations and board representation, whose costs are unobservable and cannot be estimated from public data. This paper complements recent work on hedge fund activism by providing cost benchmarks for evaluating the net returns to activism. To account for the large heterogeneity of activist events, I estimate the costs associated with three common activist approaches: demand negotiations, board representation, and proxy contest. I find that a campaign ending in a proxy fight has average costs of $10.71 million. Subtracting costs reduces the mean abnormal activist return by two-thirds suggesting that costs play a major role in an activist's decision-making behavior. The approach taken in this paper involves two interrelated parts. First, I model activism as a sequential decision process consisting of three consecutive stages of demand negotiations, board representation, and proxy contest, and define the activist's break-even constraint for monitoring for each stage. Then, I examine this trade-off condition in a discrete-choice framework and estimate the costs of activism implied by the observed decisions of hedge fund activists in 2000–2007. The starting point of this paper is a novel definition of activism as a sequence of escalating decision steps, in which an activist chooses a more hostile tactic only after less confrontational approaches have failed. A typical campaign starts with the announcement of activist intentions (usually reported in a regulatory filing), followed by communication of specific demands to the target. Initial negotiations between the activist and the target are rarely successful. The activist may choose to terminate his campaign after failed negotiations, or pursue a more direct approach by requesting a board seat. In most instances, the activist is denied board representation, in which case he has the option to solicit input from other shareholders, and eventually wage a proxy fight. The activist's decision problem is modeled as a basic trade-off between the expected benefit from campaign continuation with a specific approach and the expected cost of activist involvement. This decision can be described by the activist's break-even profit constraint for monitoring and consists of two steps. First, the activist estimates a net continuation benefit by comparing his expected reward from the campaign to the cost of intervening with a particular tactic. Then, he compares this net benefit to the market value of his current ownership stake. The activist's continuation decision defines a minimum cost threshold, at which he is indifferent between continuation and exit. I study the activist's break-even condition as a discrete-choice problem under the assumptions of random utility theory. The activist's decision is summarized by the expected gross return in a successful campaign, which relies on an estimate of its benefit, and the activist's marked-to-market investment in the target, which captures the opportunity cost of the campaign. The expected reward in a successful intervention equals the target's potential value if the activist's demands are successfully implemented. Empirically, I estimate the potential benefit from an activist engagement based on the difference in Q ratios between the target and a matched peer, and calibrate it to the actual valuation improvement in successful activist events. The estimation procedure consists of a backward sequence of conditional logistic regressions corresponding to the activist's break-even constraints for each stage of a campaign. These profit conditions also provide the structural parameters required for identification of the absolute magnitude of monitoring costs and estimation of net returns. The main contribution of this paper is providing cost benchmarks to assess the net returns to activism. I separately estimate the costs of three common activist approaches—demand negotiations, board representation, and proxy contest. The proxy contest stage has the highest cost, equal to $5.94 million for the average campaign during 2000–2007. The demand negotiations stage is the second most expensive stage of the activist process, with average costs of $2.94 million. The least expensive tactic is board representation, which adds $1.83 million to the cost of the average campaign. These estimates represent a first attempt in the literature to quantify the costs of these common activist tactics. I calculate net abnormal activist returns in excess of the value-weighted portfolio of stocks (VW returns) and in excess of characteristic portfolios based on size, market-to-book, and stock return momentum (DGTW returns).5 The mean annualized VW abnormal return is 4.02% while the mean DGTW abnormal return is 7.61%. Costs consume more than two-thirds of gross activist returns. The mean VW abnormal return drops to 0.23% while the mean DGTW abnormal return becomes 2.38% after subtracting costs. The results suggest that the top quartile of activists earns higher returns on their activist holdings than on their non-activist portfolios. Another contribution of this paper is the introduction of a large hand-collected data set of hedge fund activist campaigns between 2000 and 2007. This data set contains detailed information about the negotiation tactics employed by activists in 1,164 distinct campaigns summarized in 5,645 individual filings by 171 hedge funds and 1,023 unique targets. In addition to data from regulatory filings, the sample includes activist events reported in the business press as described in Brav, Jiang, Partnoy, and Thomas (2008).6 The comprehensive data set used in this paper provides new large-sample evidence, which aids in understanding the nature and evolution of activist engagements. I document that more than two-thirds of activists quit before making formal demands to their targets. From the sample of activists who announce specific demands, less than 20% proceed to request a board seat and only 10–12% threaten a proxy contest. Only 7% of activist campaigns end up in a proxy fight. Activists are most successful when demanding a sale (or privatization) of a target, restructuring of inefficient operations, and additional disclosure, but less successful when asking for higher dividends (or repurchases), Chief Executive Officer (CEO) removal, or executive compensation changes. In terms of the implementation of their demands, 29.17% of activists achieve their objectives. In terms of holding period returns, only the top quartile of activists earns returns higher than the returns on their non-activist holdings. I also show that more confrontational activist tactics have higher success rates. The most successful activist stage is the proxy contest, in which 57.38% of activists achieve their objectives. Board representation is effective in 39.33% of the cases while demand negotiations are successful in only 6.76% of the campaigns. Even though proxy contests are successful in the majority of activist events, only 7% of campaigns reach the proxy stage suggesting that the high costs of proxy solicitations deter some activists from pursuing their investment objectives. The evidence in this paper provides support for the recently failed effort by the U.S. Securities and Exchange Commission (SEC) to reduce the costs of using the proxy process (often referred to as “proxy access”). The rest of the paper proceeds as follows. Section 2 presents a new definition of activism as a sequential decision process and models the activist's break-even profit constraint. Section 3 discusses the empirical design, identification, and estimation of target valuations. Section 4 describes the activist sample. Section 5 reports the main empirical results and Section 6 presents robustness analysis. Section 7 concludes.