Abstract

http://ssrn.com/abstract=1960792
 


 



Does Shareholder Proxy Access Damage Share Value in Small Publicly Traded Companies?


Thomas Stratmann


George Mason University - Buchanan Center Political Economy; CESifo (Center for Economic Studies and Ifo Institute); Harvard University - Edmond J. Safra Center for Ethics

J. W. Verret


George Mason University School of Law

November 16, 2011

Stanford Law Review, Vol. 64, No. 6, June 2012, pp. 1431-1468
George Mason Law & Economics Research Paper No. 11-47
GMU Working Paper in Economics No. 11-53

Abstract:     
The field of corporate governance has long considered the costs of the separation of ownership from control in publicly traded corporations and the regulatory and market structures designed to limit those costs. The debate over the efficiency of regulations designed to limit agency costs has recently focused on the SEC’s new rule requiring companies to include shareholder nominees on the company-financed proxy statement to facilitate insurgent challengers to incumbent board members in board elections. A recent vein of empirical literature has examined the stock price effects of events surrounding the new proxy access rule. We present a study that focuses on small companies that expected an exemption from the rule under the Dodd-Frank legislation that preceded the adoption of the SEC rule. We consider the effect of the August 25, 2010 announcement of the proxy access rule, comparing its effect on the value of medium and large firms, which expected to be subject to the full rule, against its effect on the value of small firms, which were unexpectedly given only a temporary exemption from part of the rule (Rule 14a-11) and no exemption from another part of the rule (Rule 14a-8). Supporters of proxy access have long argued that it will enhance shareholder value. Critics of proxy access have argued that it will empower investors with conflicted agendas that will destroy shareholder wealth. The unexpected application of the rule to small-cap companies on August 25 provides a natural experiment for this question and allows us to examine the differential effect of the rule on firms above and below the arbitrary SEC cutoff of $75 million dollars in market capitalization. We find that the unanticipated application of the proxy access rule to small firms, particularly when combined with the presence of investors with at least a 3% interest (who are able to use the rule), resulted in negative abnormal returns. We present multiple methods to measure that effect and demonstrate losses for our sample of roughly 1000 small companies of as much as $347 million.

Number of Pages in PDF File: 39

Keywords: Argawal, Bebchuk, Berle, Business Roundtable, Coates, Cohn, D.C. Circuit, Decker, Gillan, Grundfest, Hartzell, Kahan, Larcker, Means, Ormazabal, Rock, Romano, S&P 1500, Securities and Exchange Commission, SharkWatch50 List, Subramanian, Taylor, Wall Street Reform and Consumer Protection Act of 2010

JEL Classification: G32, G38

Accepted Paper Series





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Date posted: November 18, 2011 ; Last revised: November 5, 2013

Suggested Citation

Stratmann, Thomas and Verret, J. W., Does Shareholder Proxy Access Damage Share Value in Small Publicly Traded Companies? (November 16, 2011). Stanford Law Review, Vol. 64, No. 6, June 2012, pp. 1431-1468; George Mason Law & Economics Research Paper No. 11-47; GMU Working Paper in Economics No. 11-53. Available at SSRN: http://ssrn.com/abstract=1960792

Contact Information

Thomas Stratmann
George Mason University - Buchanan Center Political Economy ( email )
4400 University Drive
Fairfax, VA 22030
United States
703-993-2330 (Phone)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Harvard University - Edmond J. Safra Center for Ethics ( email )
124 Mount Auburn Street
Suite 520N
Cambridge, MA 02138
United States

J. W. Verret (Contact Author)
George Mason University School of Law ( email )
3301 Fairfax Drive
Arlington, VA 22201
United States
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