Collective Action and Governance Activism
with Craig Doidge, Alexander Dyck, and Hamed Mahmudi
Review of Finance, 2019, Volume 23, Issue 5, Pages 893–933.
Coverage: The Wall Street Journal; The Globe and Mail; Financial Post; Harvard Law School Forum on Corporate Governance
We examine how an investor collective action organization (ICAO) enhances activism by institutional investors. The ICAO initiates private meetings with independent directors to discuss governance proposals and has incentives to engage in activism that are about six times larger than a single investor acting alone. Firms engaged by the ICAO are 58% more likely than non-engaged firms to adopt the ICAO’s governance proposals that include majority voting, say-on-pay and performance-sensitive executive pay. The ICAO’s formation elicited a positive market reaction for firms that the ICAO was likely to target. We conclude that institutional investors improve governance through collective action.
Why are Bidder Termination Provisions Included in Takeovers?
with Zhiyao Chen, Hamed Mahmudi and Xiaofei Zhao
Journal of Financial and Quantitative Analysis, forthcoming.
We examine bidder termination provisions, which enhance a bidder's ability to withdraw from a takeover, also known as reverse break-up fees. We liken a bidder termination provision to a real option on the target's assets, and show that the provisions create value in some takeovers and not others. We find that inclusion of the provisions and size of termination fees payable by bidders are related to the optionality of a takeover and that pricing fees appropriately may increase the value created in M&A.
Do Agency Problems Drive Political Spending?
Evidence from Dodd-Frank Clawback Regulation
with Tor-Erik Bakke and Hamed Mahmudi
Revise and Resubmit at the Journal of Accounting Research
Firms whose shareholders would benefit more from the introduction of Dodd-Frank mandatory clawback provisions contribute more to politicians who are likely to impede the mandate. We measure the extent to which firms would benefit from mandatory clawback provisions using the stock market reaction to the SEC’s announcement of a proposed rule that would mandate clawbacks. Firms with greater market reactions to the announcement exhibit a greater increase in political contributions between the pre- and post-announcement periods to election candidates who are likely to take action to weaken these clawback rules.
Quasi-Insider Shareholder Activism:
Corporate Governance at the Periphery of Control
with Jonathan Cohn and Mitch Towner
Revise and Resubmit at the Review of Corporate Finance Studies
Coverage: Columbia Law School Blue Sky Blog
We document the role of investors at the periphery of control in corporate governance. These investors, whom we term "quasi-insiders", include founders, former CEOs, and other former officers. Quasi-insiders launch activist campaigns in smaller and worse-performing firms than traditional activists, and use aggressive tactics to seek greater control. Their campaigns are associated with positive market reactions comparable to those in other activist campaigns, and subsequent improvements in operating performance. The presence of a quasi-insider blockholder is associated with a significant increase in the sensitivity of CEO turnover to performance. We conclude that quasi-insiders play a meaningful role in governance for firms that other investors might ignore.
The Impact of a Principles-Based Approach
to Director Gender Diversity Policy
with Tor-Erik Bakke, Laura Field, and Hamed Mahmudi
We study the impact of a principles-based (i.e., comply or explain) regulatory approach to mandating female representation on corporate boards. We find that firms most likely to be affected by principles-based regulation exhibit positive abnormal returns around its announcement and exhibit a 30% increase in the fraction of female directors over the longer term. Compliance with the gender diversity policy increases over time and non-compliance appears to be related to the supply of female directors.
The Value Implications of Mandatory Clawback Provisions
with Tor-Erik Bakke and Hamed Mahmudi
We examine firm policies requiring the recoupment of erroneously awarded performance-based compensation from executives, known as clawback provisions. We study the value implications of clawback provisions by examining the stock market’s reaction to the SEC’s announcement of a proposed rule mandating their adoption. We find that clawback provisions are value-enhancing, particularly for firms with captured boards, which are more likely to resist their adoption.