Thirty Years Of Shareholder Activism: A Survey Of Empirical Research

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Thirty Years Of Shareholder Activism: A Survey Of Empirical Research

Matthew Denes

University of Washington – Department of Finance and Business Economics

Jonathan M. Karpoff

University of Washington – Michael G. Foster School of Business

Dr. Victoria McWilliams

Villanova University

May 18, 2015


We summarize and synthesize the results from 67 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary conclusions. First, activism that adopts some characteristics of corporate takeovers, especially significant stockholdings, is associated with improvements in share values and firm operations. Activism that is not associated with the formation of ownership blocks is associated with insignificant or very small changes in target firm value. Second, shareholder activism has become more value increasing over time. Research based on shareholder activism from the 1980s and 1990s generally finds few consequential effects, while activism in more recent years is more frequently associated with increased share values and operating performance. These results are consistent with Alchian and Demsetz’ (1972) argument that managerial agency problems are controlled in part by dynamic changes in ownership, and with Alchian’s (1950) observation that business practices adapt over time to mimic successful strategies.

Thirty Years Of Shareholder Activism: A Survey Of Empirical Research – Introduction

“But who will monitor the monitor?” This question, posed by Armen Alchian and Harold Demsetz in their seminal 1972 paper, is at the core of economists’ efforts to understand the organization of economic activity that involves joint team production. Team production yields synergies that are undeniably beneficial, but it comes with a built-in cost. The team’s output is not simply the sum of each team member’s separable outputs, so it is difficult to match rewards to each person’s contribution. This creates incentives to shirk.

The shirking problem – now more popularly recast as the agency problem – is particularly acute in large-scale endeavors efficiently organized through the corporate form. Alchian (1950) first proposed that organizational characteristics are selected by, and adapt to, the competitive environment, an idea that Alchian and Demsetz (1972) developed into a broad theory of corporate governance. According to Alchian and Demsetz, scale economies, individual wealth constraints, and risk aversion combine to make the corporate form of organization efficient for some production processes, but “… modifications in the relationship among corporate inputs are required to cope with the shirking problem that arises with profit sharing among large numbers of corporate stockholders.” These modifications include the delegation of decision authority to corporate boards and managers, the retention of control rights by shareholders, the free transfer of ownership rights, an external market for corporate control, a process to resolve internal disputes including proxy battles, and direct shareholder intervention in the firm’s decision process.

Alchian and Demsetz’ “modifications” describe the major branches of current corporate governance research.2 In this paper, we examine the latter two modifications, proxy battles and shareholder intervention, now known as shareholder activism. We summarize and synthesize 67 empirical research papers that provide insight into both the promise and limitations of shareholder activism in disciplining corporate managers and mitigating Alchian and Demsetz’ shirking problem. The evidence indicates that Alchian’s (1950) insights apply directly to this aspect of corporate governance: Shareholder activism has changed over time as the competitive process has adopted its more successful strategies and activists increasingly have adapted these strategies.

Figure 1 highlights one of the main results from this survey. Alchian and Demsetz (1972, p. 788) emphasize that “control is facilitated by the temporary congealing of share votes into voting blocks…,” particularly through changes in share ownership. Activist efforts that do not require the formation of blockholdings include shareholder proposals initiated under Section 14a-8 of the Securities and Exchange Act of 1934, and direct negotiations with managers. As indicated in Figure 1, these types of shareholder activism are associated with small or negligible changes in target firm value. At the other extreme, corporate takeovers typically involve the formation of large blockholdings and create large changes in firm valuation that average 15%. Hedge fund activism and proxy fights lie between these two extremes in the “congealing of share votes,” as they are associated with toehold investments by the activist that average 8.8% and 9.9%, and are associated with average valuation effects of 5.3% and 6.8%, respectively.

Shareholder Activism

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