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Review of Accounting Studies

Erschienen in:

08.06.2017

Shareholder activism and voluntary disclosure

verfasst von: Thomas Bourveau, Jordan Schoenfeld

Erschienen in: Review of Accounting Studies | Ausgabe 3/2017

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Abstract

We examine the relation between shareholder activism and voluntary disclosure. An important consequence of voluntary disclosure is less adverse selection in the capital markets. One class of traders that finds less adverse selection unprofitable is activist investors who target mispriced firms whose valuations they can improve. Consistent with this idea, we find that managers issue earnings and sales forecasts more frequently when their firm is more at risk of attack by activist investors, and that these additional disclosures reduce the likelihood of becoming an activist’s target. These additional disclosures also prompt a positive price reaction, contain more precise guidance, and exceed prevailing market expectations. These findings imply that managers use voluntary disclosure to preempt activism at their firm, and that activists prefer to target relatively opaque firms.

Vorheriger Artikel The role of specialists in financial reporting: Evidence from pension accounting

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In Section 4.1, we validate and provide a full discussion of our research design. In Section 4.5, we provide some descriptive evidence for the disclosures of the activist-targeted firms. Following Brav et al. (2015), we study activist campaigns initiated by hedge funds, investment advisors, and public pension funds (see Section 3 for how we identify activist campaigns).

We further motivate our use of guidance in Section 3. In Section 5, we corroborate our guidance results using voluntary 8-K filings.

For example, see http://carlicahn.com/carl-icahn-issues-open-letter-to-tim-cook/.

Consistent with the idea that activists prefer mispriced firms, Fos (2017) finds that, in the much broader setting of proxy contests, 41% of dissident shareholders report undervaluation as their primary interest in the firm. Perhaps to mitigate scrutiny from these investors, managers tend to disclose more favorable news as the annual shareholder meeting approaches (Dimitrov and Jain 2011).

The Schedule 13D is a document that shareholders must file with the SEC when they accumulate 5% or more of a firm’s common stock (see Section 3).

On the other hand, once an activist targets a firm, all preemptive actions become futile. In Section 4.5, we provide our observations of what happens when an activist targets a firm.

Note that stock liquidity can also lower the net benefit to informed activist trade, so the theoretical prediction here is highly ambiguous. Empirical studies of activism and liquidity focus on liquidity arising from exogenous sources such as decimalization (e.g., Edmans et al. 2013; Norli et al. 2015). Our setting differs from these studies because disclosure affects many factors related to activism, not just liquidity.

This intuition appears to be well grounded in practice. In a May 2015 report on activism, PricewaterhouseCoopers noted that “Companies that can articulate their strategy and demonstrate that it is grounded in a well-considered assessment of both their asset portfolios and their capabilities may be more likely to minimize the risk of becoming an activist’s target.”

For example, focusing only on 13Ds would exclude Carl Icahn’s recent effort at eBay to replace board members and divest PayPal (see “Ending Vitriol, Icahn and eBay Reach a Deal” by Michael J. de la Merced, The New York Times, April 10, 2014). Similarly, ValueAct succeeded in obtaining board representation at Microsoft with less than 1% ownership in the firm (see “New Alliances in Battle for Corporate Control” by David Gelles and Michael J. de la Merced, The New York Times, March 18, 2014).

When data collection started, we included a small number of firms from 2011 whose 2012 and 2013 Compustat and CRSP data had already become available. For this reason, the number of observations for 2011 is limited.

Including intangible assets in our specification cannot fully identify this phenomenon, as the present value of future R&D and new products will not be capitalized.

To maximize the pool of potential matches, we do not include a firm-level governance index in our propensity score specification, as these data are generally available only for large companies. However, Bebchuk et al. (2009, Table 2) report that such indices are highly stable over time, which suggests that we can appropriately control for them using firm-fixed effects (see Section 4.2).

In Section 5, we conduct several alternative matching procedures.

The activism companies in our sample are larger than those in the sample of Brav et al. (2008). This finding could be due to our (more recent) unique sample, which includes activism events at all levels of ownership, not just 5% plus. For example, acquiring 5% of a firm’s common stock, a required condition to join the sample of Brav et al. (2008), may tilt the sample towards small firms that activists can afford. Recall that our FactSet sample covers all publicly traded U.S. companies and activist events at all ownership levels.

Brav et al. (2015) use 13D filings to identify activism and have a sample of 1,575 firms from 1994 to 2007. The five most frequently occurring activist funds in our sample are GAMCO Asset Management Inc. (72 campaigns), the California Public Employees’ Retirement System (29), ValueAct Capital Management LP (29), Millennium Management LLC (25), and Starboard Value LP (19).

In Section 5, we corroborate our guidance findings using voluntary 8-K disclosures.

Note that we cannot use a closely matched control firm to account for common disclosure trends. The reason is that such a control firm would face increased activism exposure as well, and thus we would expect our result to occur in that firm. The appropriate empirical solutions are to (1) isolate a suitable proxy for general disclosure trends that is unrelated to activism exposure and (2) check whether our main result attenuates in weaker activism-treatment firm matches, where activism exposure is plausibly lower (Rosenbaum and Rubin 1985). We conduct such an analysis in Section 5.

We recognize that the 11.1% probability relates to a two-year period, whereas the 2.4% relates to a one-year period. Even if one were to double the 2.4%, the 11.1% still represents a large increase from that.

This approach builds on other studies that use stock returns for similar purposes. For example, Schwert (1981) and Binder (1985) use stock returns to identify the effect of unexpected changes in regulation.

If we winsorize the unsigned return result at the 5% level from the top, the magnitude of our result declines to about 4.7% but is still significant at the 1% level. This result does not appear to be driven by changing risk characteristics in the treatment firm, as changes in treatment firms’ stock return volatility and market beta are statistically insignificant from the pre to the post period.

Note that our activist events are staggered in time throughout our sample period of 2005 to 2011, reducing the likelihood that any single time-varying factor would drive our results. In Section 5, we conduct several within-industry analyses to help ensure that our results are not driven by an industry effect unrelated to the treatment firm’s activism exposure.

This pairing-specific approach is ideal for our setting because each observation spans four years (two years pre and two years post) and could begin at a different time within a given year.

Including guidance disclosures for U.S. I/B/E/S firms as a regressor in order to achieve a baseline guidance level is a difference-in-differences identification method discussed further by Bertrand et al. (2004) and used in such studies as that of Cheng et al. (2004).

These measures have been researched extensively, and the [−1 day, + 1 day ] return window is standard in the empirical guidance literature (Beyer et al. 2010).

Recall from Section 4.2 that one advantage of our nonparametric research design is that it abstracts away from the variety of available functional form assumptions about activism exposure and any of our independent and dependent variables. Also, although we include several firm attributes as regressors in our propensity score specification, this does not eliminate the possibility that across pairings there could be variation in how managers internalize activism exposure. Our analyses in this section explicitly test this idea.

Because the sample split reduces the number of observations in each regression, we do not cluster standard errors by industry; however, standards errors are robust to heteroscedasticity. Split-sample tests are also used by Cheng et al. (2004), Ertimur et al. (2014), and Garvey and Hanka (1999), and Ofek and Yermack (2000).

To ensure that our three cross-sectional tests are distinct, we compute Pearson correlations for the indicator variables for dividends, takeover defenses, and open letters (the variables upon which we split our sample). The largest of the correlations is 0.075 and statistically significant at the 5% level (takeover defense and open letter). The correlations for takeover defense and dividends and for open letter and dividends are statistically insignificant at 0.031 and 0.020, respectively. This suggests that our cross-sectional analyses are distinct tests of the relation between activism exposure and disclosure.

To address the guidance initiation coverage issues found by Chuk et al. (2013), we run a separate test and find similar results for treatment firms above the median market value of our sample and with more than two analysts (in both the pre and post periods).

We find slightly weaker results when we drop guidance initiators and split our sample on only the percentage change in guidance issuances from the pre to the post period. For this test, the probability of being targeted by an activist investor is 11.9% for the high disclosers and 13.4% for the low disclosers (difference is significant at the 10% level).

This result also helps to bolster the validity of our matching procedure. For our findings to be driven by some unobserved factor common to both target and treatment firms (e.g., an industry effect), the disclosure results here should be similar for both the target firms and the treatment firms. Our analysis shows otherwise.

Our approach of limiting the analysis to propensity scores within certain bounds is motivated by the matching-distance idea described by Mahalanobis (1936) and subsequently demonstrated with propensity scores by Rosenbaum and Rubin (1985). This methodology is especially useful in our setting, as the idea that activism in one firm increases activism exposure in a closely matched treatment firm forecloses the option of pairing each treatment firm to a baseline control firm (such a control firm would face increased activism exposure as well).

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Titel: Shareholder activism and voluntary disclosure
verfasst von: Thomas Bourveau
Jordan Schoenfeld
Publikationsdatum: 08.06.2017
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 3/2017
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-017-9408-0

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