How Does the Market React When Shareholders Lose Power?

Abstract

Using a decision made by a corporate vote tabulating firm which reduces shareholder power, I examine how the market views shareholder proposals and, in general, whether shareholder empowerment creates value. I find that the overall market reaction to the decision made by the vote tabulating firm was positive, suggesting that the market views the limiting of shareholder power favorably. I also find that the type of proposal as well as its sponsor matters. The market’s reaction was negative for better performing firms, firms which were targets of proxy fights, and firms which had proposals sponsored by hedge funds. On the other hand, the market’s reaction for firms with social responsibility proposals and firms with proposals submitted by individual investors was positive. My results suggest that it is important to understand how shareholders get involved in corporate affairs to correctly gauge the benefits and costs of shareholder empowerment.

Keywords: shareholder proposals, shareholder empowerment, governance

JEL Classification: G34