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Shareholder activism: the interactions between firm meetings and asset markets

Wu, Yue (2024) Shareholder activism: the interactions between firm meetings and asset markets. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004569


My thesis aims to investigate how different financial markets (equity lending, option, and stock) could work together to separate cash flow rights and voting rights, how different agents (large shareholders, activist investors, and managers) choose their optimal action with the existence of such markets, and the consequences of their actions. In Chapter I, I document the empirical relevance between equity lending and call-and-put option trading markets for the separation of voting rights and cash flow rights. I explore the cross-sectional and time series variation of the voting price and lending/option-trading volume in the two markets around the firm meeting voting record date, the time when voting shares holding is registered for the firm meeting. Price-wise, voting rights are in general higher measured by option trading than in the equity lending market, however lower during director elections. Volume-wise, there exists an observable increase in options trading volume before firm meetings, especially for non-regular filings. These facts reveal that shareholder activism generally exists before controversial meetings and voting rights are in high demand in one market or another before firm meetings. In Chapter II, I investigate the price and quantities associated with firm voting rights in two markets that facilitate voting rights trading around the firm's meeting voting record date. I show there exists a cross-substitution between the two markets regarding voting rights trading. With a lower supply of shares in the equity lending market, I found increasing institutional investors' abnormal buy in the shares trading market, and simultaneously, lower price of voting rights. I introduce exogenous variation of equity lending supply through total passive institutional holding. Such evidence supports the prevalence of empty voting practice before firm meetings. In Chapter III, I examine the impact of shareholder activism on firm valuation and managerial behavior through a particular channel: management proposals. I study the theoretical implication of the management rent-seeking motives if we consider the manager’s project searching monitored by a large share-holder and hence, causing the manipulation of management proposal voting at firm meetings. With such an understanding, I explore the impact of shareholder rejecting management proposals. As analysed by the theory, the higher private benefit, the higher management proposal manipulation at the firm voting, and hence, causing empirical endogeneity problem. Thus I introduce a novel souce of exogenous variation, pre-meeting call option trading volume, which is shown to cause more management proposal failures. With this instrument, I find diverging effects of shareholder activism and managerial initiative. Private benefit leads to managerial value creation in total, and is associated with lower non-CEO executive turnover; on the contrary, activism leads to large 7 days cumulative abnormal returns and is associated with higher non-CEO executive turnover, showing that activism does have a counter-effect on management rent-seeking at a cost. In this chapter, I measure managerial private benefit through reversing the option-constructed voting premium and find that this helps with identifying the effect of managerial voting manipulation. To conclude, I find that empty voting is a widely existing practice and is shown, both theoretically and empirically, to be associated with firm outcomes. Both firm management and activists employ them in different fashion and different markets. Highlighting the role of such practice helps with introducing additional empirical evidence relating to the analysis of corporate governance in general.

Item Type: Thesis (PhD)
Additional Information: © 2024 Yue Wu
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Finance
Supervisor: Burkart, Mike and Cuñat, Vicente

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