Institutional Investor Activism: Follow the Leaders?

Posted: 6 Feb 1997

See all articles by Catherine M. Daily

Catherine M. Daily

Purdue University - Krannert School of Management

Jonathan L. Johnson

University of Arkansas - Sam M. Walton College of Business

Alan E. Ellstrand

California State University, Long Beach

Dan R. Dalton

Indiana University - Kelley School of Business - Management & Entrepreneurship

Date Written: October 1996

Abstract

Michael Jensen of the Harvard Business School, recently quoted in The Wall Street Journal, noted that "institutional activism is never going to amount to anything." A sharply contrasting view is evident from Fortune which held that the power of such groups "will be one of the most important business forces of the nineties." This apparent difference of opinion would appear to matter: Institutional investors, primarily private and public pension funds, currently control more than 50 percent of corporate equity. Certain activist institutions have been successful in changing some aspect of target corporations. Examples would include insisting on boards of directors with more outside, independent directors, the elimination of some anti-takeover provisions, separation of the role of CEO from that of the chairperson of the board, and elements of executive compensation. While many of these changes were sought and attained by some activist institutions, the issue had remained unsettled whether such strategies result in bottom line financial performance of the institutions' equity holdings. In this study of 200 Fortune 500 companies, a total of 975 separate institutional investors were listed as holding stock in these 200 firms. The thirty-six firms representing pension funds for city, state, and federal employees were classified as public. This is an important distinction as it is these public pension funds which have been the most activist of the institutional investors. Moreover, 13 institutional investors that sponsored or co-sponsored one or more shareholder proposals or proxy fights from 1986 to 1994 were identified, including California Public Employees Retirement System (CalPERS) fund, College Retirement Equities Fund (CREF), and New York State Common Retirement Fund. This, too, is an indication of institutional activism. The results of this study, relying on both accounting and market financial returns over a four-year period, indicate that, on average, firms with higher proportions of their equity held by institutional investors do not enjoy higher performance. Moreover, these is no evidence that the firms targeted by the activist funds through shareholder proposals or proxy fights were characterized by higher financial performance.

JEL Classification: G32, G34

Suggested Citation

Daily, Catherine M. and Johnson, Jonathan L. and Ellstrand, Alan E. and Dalton, Dan R., Institutional Investor Activism: Follow the Leaders? (October 1996). Available at SSRN: https://ssrn.com/abstract=10299

Catherine M. Daily (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
317-494-4415 (Phone)
317-494-0818 (Fax)

Jonathan L. Johnson

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States
501-575-6227 (Phone)
501-575-7687 (Fax)

Alan E. Ellstrand

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States
310-985-4557 (Phone)
310-985-4358 (Fax)

Dan R. Dalton

Indiana University - Kelley School of Business - Management & Entrepreneurship ( email )

Bloomington, IN 47405
United States
812-855-8489 (Phone)
812-855-8983 (Fax)

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