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

Explore the dynamics of shareholder activism using a zero-inflated model with Bayesian analysis. Learn about the theoretical indeterminacy, managerial challenges, and methodological issues associated with shareholder activism. Understand the types of targets and proposals involved, including examples like Wal-Mart resolutions. Delve into the processes, firm attributes, and governance actions related to shareholder activism, including visible and opaque activism. Discover the significance of the zero-inflated regression data and Bayesian approach in understanding shareholder activism patterns. Contribute to the advancement of knowledge in this area and unlock insights for future research.

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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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