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Activists at the Gate: Zero-inflated Model of Shareholder Activism with Bayesian Analysis

Activists at the Gate: Zero-inflated Model of Shareholder Activism with Bayesian Analysis. Maria Goranova Rahi Abouk Paul Nystrom Ehsan Soofi. Shareholder Activism Trends. “ Shareholder Spring ” (Farrell, 2012; Morphy, 2012)

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Activists at the Gate: Zero-inflated Model of Shareholder Activism with Bayesian Analysis

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  1. Activists at the Gate: Zero-inflated Model of Shareholder Activism with Bayesian Analysis Maria Goranova Rahi Abouk Paul Nystrom Ehsan Soofi

  2. Shareholder Activism Trends “Shareholder Spring” (Farrell, 2012; Morphy, 2012) “Activists have captured the center ring and are directing the main event” (Duhigg, 2004: C1) Waste of management's time and the corporation’s money” (Cane, 1985:70) Subversion of the annual shareholder meeting (Vogel, 1983)

  3. Shareholder Activism Research • Theoretical Indeterminacy Managerial Problems Better Monitoring • Equivocal Findings Outcomes of Shareholder Activism Antecedents of Shareholder Activism • Methodological Problems Multiple shareholder demands = Single shareholder demand Unobservable activism = Lack of activism

  4. Shareholder Activism: Targets & Proposals

  5. Shareholder Activism: Targets & Proposals • Example: Wal-Mart shareholder resolutions: • Charitable contributions • ESOP • Pay for performance • Employment discrimination • Pro-business environment • Advisory vote on pay • Political influence • Human rights • Cumulative voting • Director qualifications

  6. Shareholder Activism: Zeroes

  7. Shareholder Activism: Zeroes • Private activism 4 times more prevalent than public(Rubach & Sebora, 2009) • Going pubic is not activist’s first choice (Atlas, 2005) • Public activism only if private efforts are unsuccessful (Carleton et al, 1998; Gantchev, 2013)

  8. Shareholder Activism Process

  9. Shareholder Activism: Zero-inflated Count Process Firm & Governance attributes Shareholder & Managerial actions Opaque activism Visible activism Preemptive actions Count process Number of proposals: 0,1,2,… Failure Success Zero-inflated Count process Number of proposals: 0,1,2,…

  10. Shareholder Activism: Probability Model Firm & Governance attributes Shareholder & Managerial actions Opaque activism Visible activism

  11. Shareholder Activism: Zero-inflated Regression

  12. Data • CDA/Spectrum Thomson Financial 13F database • 257 companies were studied from 1998 to 2003 • N = 1,542

  13. Variables • Dependent variable: • Number of shareholder proposals disclosed on the firm’s proxy statement • Independent variables: • Firm size (log of asset) • Return on shareholders’ equity (ROE) • Book value-to-market value ratio (BTM) • Debt-to-equity ratio • CEO ownership • CEO compensation • Board independence • CEO duality • Board size • Top ownership • Institutional ownership

  14. Shareholder Activism Process

  15. Shareholder Activism: Zero-inflated Regression

  16. Bayesian approach

  17. Bayesian approach: Implementation • Prior distribution: Normal, mean=0, Variance=1,000 • Symmetric around zero • Nearly flat (non-informative) • Data information • Likelihood function (Zero-inflated Poisson) • Post data uncertainty • Markov Chain Monte Carlo (MCMC) • Simulate 1,000,000 (serially correlated) • Thinning (keep every 10th outcome) • Posterior sample size = 100,000 • Estimate the entire posterior distribution • Posterior statistics (Mean, SD, Median, …)

  18. Prior Distribution of regression coefficients • Symmetric around zero, nearly flat (non-informative)

  19. Prior and Posterior Distribution • CEO Compensation (Poisson part) • Bayes estimate of b

  20. Posterior Distribution • CEO Compensation (Poisson part) • Heterogeneity of regression relationship among firms

  21. Number of proposals & zero-inflation

  22. Number of proposals & zero-inflation

  23. Number of proposals & zero-inflation Proportion of inflated 0’s 34.5%

  24. Probability of zero proposal for sampled firms Probability of no proposal Probability of 0-inflation Probability for ith firm Poisson probability Probability of 0-inflation

  25. Probability of zero proposal for sampled firms Probability of no proposal Probability of 0-inflation

  26. Posterior Distribution • CEO Compensation (Poisson part) • Positive association

  27. Posterior Odds

  28. Bayes Factor (BF) • CEO Compensation (Poisson part) • Bayes factor

  29. Bayes Factor: Grade of Evidence Jeffreys (1961), Kass & Raftery (1995)

  30. Posterior Distributions for CEO Compensation Number of Proposals Probability of Private Deal

  31. Limitations and Directions for Future Research • Focus on Firms • Activists may have different targeting rationale • Proxy based activism • Media campaigns • 13-D filings • Other management constructs

  32. Contribution to Prior Research • Theoretical • Opening the black box of activism • Methodological • Different public shareholder demands • Opaque activism • Practical • Shareholder empowerment as a double edge sword

  33. Thank you! Questions?

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