Impact of Shareholder Proposals on the Functioning of the Market for Corporate Control

• Date: 01 August 2017
• DOI: http://doi.org/10.1111/fire.12125
• Published date: 01 August 2017

The Financial Review 52 (2017) 347–371

Impact of Shareholder Proposals

on the Functioning of the Market

for Corporate Control

Rwan El-Khatib

College of Business, Zayed University

Kathy Fogel

Zinoplex, Inc.

Tomas Jandik∗

Sam M. Walton Collegeof Business, University of Arkansas

Abstract

Firms receiving shareholder proposals are 16% more likely to become a target of acquisi-

tion. Such companies earn approximately 7.2% lower acquisition returns compared to gains for

targets with no proposals. Higher acquisition likelihood and lower target returns are primarily

associated with proposals drawing a larger proportion of favorable votes, largervoter turnout,

as well as with proposals submitted shortly before takeover announcements, and motivated by

the removal of antitakeover provisions. Our findings suggest that shareholder proposals can

assist bidders in the identification of targets or signal the willingness of target shareholders to

accept bids with lower premiums.

Keywords: shareholder activism, shareholder proposals, mergers & acquisitions, internal

governance, external governance, market for corporate control, shareholder gains

JEL Classifications: G30, G34

∗Corresponding author: 343 Sam M. Walton Collegeof Business, University of Arkansas, Phone: (479)

575-6147; Fax: (479) 575-4230; E-mail: TJandik@walton.uark.edu.

Wethank the anonymous referee, the Editor (Richard Warr), and the seminar participants at the University

of Arkansas, 2015 Southwestern Financial Association conference (Houston), and 2015 Eastern Finance

Association conference (New Orleans) for helpful comments.

C2017 The Eastern Finance Association 347

348 R. El-Khatib et al./The Financial Review 52 (2017) 347–371

1. Introduction

Extensive research has been conducted on the trends of shareholder proposals

over time and the effect of such proposals on internal governance issues such as

CEO turnover, executive compensation, and the value and efficiency of the firm

(e.g., Gillan and Starks, 2000, 2007; Morgan, Poulsen and Wolf, 2006; Thomas and

Cotter, 2007; Ertimur, Ferri and Stubben, 2010; Renneboog and Szilagyi, 2011). The

evidence on the creation of shareholder value is largely mixed. Some studies show

little or no evidence of improvement in long-term stock returns’ performance or

operating performance after activism (Karpoff, Malatesta and Walkling, 1996; Song

and Szewczyk, 2003; Thomas and Cotter, 2007). Others find improvement in long-

run operating performance or positive market stock reactions (Brav, Jiang, Partnoy

and Thomas, 2008; Klein and Zur, 2009; Buchanan, Netter and Yang, 2010). One

explanation for the ineffectiveness of shareholder proposals is that boards are not

obliged to implement any proposal recommendations, even if the proposals receivea

majority of support by shareholders (Levit and Malenko, 2011). Thus, it is difficult

to attribute the lack of improvement in corporate governance to the ineffectiveness

of shareholder activism.

On the other hand, shareholder proposals may be useful in supporting external

governance in the forms of takeovers. Some shareholder proposals are motivated by

the removal of various antitakeoverprovisions such as poison pills, classified boards,

supermajority requirements, etc. In addition, shareholder activism often represents a

form of concern or outright dissatisfaction with the activities of a firm’smanagement

(Gillan and Starks, 2000), so shareholder proposals may identify potential targets of

acquisitions motivated by disciplining or replacement of underperforming managers.

This paper is the first study to present evidence of subsequent acquisitions

following shareholder proposals. Ultimately,we extend existing, relatively scarce, fi-

nance research on the overall impact of shareholder activismon acquisition outcomes,

most notably Greenwood and Schor (2009), who show that announcements of hedge

fund activism are accompanied by positive stock reaction if the targeted firm ulti-

mately ends up acquired. However, in contrast to Greenwood and Schor (2009), our

paper is the first study of its kind that focuses on the direct link between shareholder

proposals (by all possible types of investors—labor unions, pension funds, hedge

funds, investment management funds, socially responsible or religious investors, as

well as individuals) and actual acquisition outcomes (takeover likelihood and acqui-

sition abnormal returns). Using a comprehensive sample of corporate governance-

oriented shareholders proposals submitted to Standard & Poor’s(S&P) 1500 firms, we

show that higher shareholder-voter turnout and higher percentage of favorable votes

both link to a higher likelihood of the proposal firms being subsequently acquired.

Compared to firms without any shareholder proposals, those receiving proposals are

associated with approximately a 16% relatively higher chance of becoming a tar-

get of a subsequent completed acquisition. We further show significantly smaller

target abnormal acquisition returns for takeover targets affected by shareholder