Activism and the Shift to Annual Director Election

40 Pages Posted: 17 Feb 2014 Last revised: 23 Sep 2014

See all articles by Re-Jin Guo

Re-Jin Guo

University of Illinois at Chicago - Department of Finance

Timothy A. Kruse

Xavier University - Department of Finance

Tom Nohel

Loyola University of Chicago

Date Written: February 7, 2014

Abstract

We examine a comprehensive sample of firms that dismantle their staggered board in favor of annual director elections. We focus on the period following the passage of the Sarbanes-Oxley act of late 2002 and we find 465 instances between 2003 and 2010. Investor reaction to these decisions is muted but nonetheless significantly positive at the 5% level. We find that the type shareholder activism is of considerable importance in determining the form of this self-imposed governance reform: when the change is pushed by aggressive hedge fund activists the board is more likely to embrace annual elections immediately and the markets react very favorably to the change, but if the change is pushed by non-binding shareholder proposals, the response is to drag out the change as much as possible and the markets are commensurately unimpressed. Moreover, our sample firms are substantially more likely to be taken over in the ensuing two years when the shift to annual director elections is pushed by activist hedge funds.

Keywords: corporate governance, classified board, hedge fund activism

JEL Classification: G3

Suggested Citation

Guo, Re-Jin J. and Kruse, Timothy A. and Nohel, Tom, Activism and the Shift to Annual Director Election (February 7, 2014). Asian Finance Association (AsianFA) 2014 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2396565 or http://dx.doi.org/10.2139/ssrn.2396565

Re-Jin J. Guo (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-413-3718 (Phone)

Timothy A. Kruse

Xavier University - Department of Finance ( email )

United States

Tom Nohel

Loyola University of Chicago ( email )

820 North Michigan Avenue
Chicago, IL 60611
United States
312-915-7065 (Phone)
312-915-8508 (Fax)

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