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

Date01 August 2017
Published date01 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
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:
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.
C2017 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

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT