New research co-authored by London Business School’s Elroy Dimson suggests that investors who actively engage with the companies they own to improve governance and strategy outperform more passive rivals.
The paper, Active Ownership with Oguzhan Karakas and Xi Li, focuses on corporate social responsibility engagements on environmental, social and governance issues.
The authors find average one-year abnormal return after initial engagement is 1.8%, with 4.4% for successful engagements whereas there is no market reaction to unsuccessful ones. The positive abnormal returns are most pronounced for engagements on the themes of corporate governance and climate change:
We find that reputational concerns and higher capacity to implement corporate social responsibility changes increase the likelihood of a firm being engaged and being successful in achieving the engagement objectives. Target firms experience improvements in operating performance, profitability, efficiency, and governance indices after successful engagements.
Figure 1 from the paper shows cumulative abnormal returns around corporate social responsibility engagements (click to enlarge):
Dimson is perhaps best known for his global equity premia research (for example, Triumph of the Optimists and Equity Premia Around the World) with LBS colleagues Paul Marsh and Mike Staunton.
A version of the paper can be found on SSRN here.
Via Financial News’ Studies reveal the value of activism.
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Embedded below is my Fall 2012 strategy paper, “Hunting Endangered Species: Investing in the Market for Corporate Control.”
From the executive summary:
The market for corporate control acts to catalyze the stock prices of underperforming and undervalued corporations. An opportunity exists to front run participants in the market for corporate control—strategic acquirers, private equity firms, and activist hedge funds—and capture the control premium paid for acquired corporations. Eyquem Fund LP systematically targets stocks at the largest discount from their full change‐of‐control value with the highest probability of undergoing a near‐term catalytic change‐of‐control event. This document analyzes in detail the factors driving returns in the market for corporate control and the immense size of the opportunity.
Hunting Endangered Species: Investing in the Market for Corporate Control Fall 2012 Strategy Paper
This is the investment strategy I apply in the Eyquem Fund. It is obviously son-of-Greenbackd (deep value, contrarian and activist follow-on) and, although it deviates in several crucial aspects, it is influenced by the 1999 Piper Jaffray research report series, Wall Street’s Endangered Species.
For more of my research, see my white paper “Simple But Not Easy: The Case For Quantitative Value” and the accompanying presentation to the UC Davis MBA value investing class.
As always, I welcome any comments, criticisms, or questions.
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A new Journal of Finance paper examines whether improvements in a company’s internal corporate governance create value for shareholders. In The Vote is Cast: The Effect of Corporate Governance on Shareholder Value Vicente Cuñat, Mireia Gine, and Maria Guadalupe analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings to identify the impact of shareholder sponsored changes to governance rules on shareholder values and management behavior. Cuñat et al find that passing a proposal leads to significant positive abnormal returns:
Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, stronger investor activism, and for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long-term performance improves.
The authors also conclude that, besides establishing how much shareholder value is generated by increasing shareholder rights and improving corporate governance inside firms, shareholder activism can create significant value:
Improving democracy inside firms, so that shareholder proposals that fall short of the majority threshold pass, would be value-increasing. We are able to precisely quantify that value.
We find that institutional activists’ proposals have higher effects, with an abnormal return of 2.1% on the day of the vote and a further 2.2% over the following six days. For individual proponents, the cumulative effect after one week is just 1.1%, and it is not statistically different from zero.
Read the full paper here: The Vote is Cast: The Effect of Corporate Governance on Shareholder Value (February 17, 2010 version on SSRN)
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