Showing papers by "Wei Jiang published in 2018"

Picking Friends Before Picking (Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests

Abstract: This paper provides the first comprehensive study of mutual fund voting in proxy contests. Funds tend to vote against incumbent management at firms with weak operating and financial performance, and in favor of dissidents with credible track records. Passive funds are active monitors although they are more supportive of incumbent management than active funds. We document a positive selection effect: dissidents are more likely to initiate contests and proceed to voting when shareholders are expected to be more supportive based on observable and unobservable event characteristics as well as inherent pro-activist investor stance. Overall, institutional investors play a pivotal role in shaping the initiation and outcomes of proxy contests.

Influencing Control: Jawboning in Risk Arbitrage

Abstract: In an “activist risk arbitrage,” a shareholder attempts to improve terms of an announced M&A through public campaigns. Activists target deals with low premiums and those susceptible to managerial conflicts of interest, including going‐private deals and deals in which CEOs receive outsized payments. Activist arbitrageurs are associated with a significant decrease in the probability that targets will be sold to the announced bidders, and an increase in the premium paid, both ex post among surviving deals and ex ante among all deals. Activist arbitrage serves as a governance mechanism in M&A and earns higher returns than passive arbitrage.

Will Tenure Voting Give Corporate Managers Lifetime Tenure

Abstract: Dual-class voting systems have been widely employed in recent initial public offerings by large tech companies, but have been roundly condemned by institutional investors and the S&P 500. As an alternative, commentators have proposed adoption of tenure voting systems, where investor voting rights increase with the length of time that they hold shares. In furtherance of this proposal, some Silicon Valley investors have requested that the SEC permit the creation of a new stock exchange where all of the companies will be required to use tenure voting systems. Is tenure voting a better choice than dual-class stock for both corporate management and shareholders? In this paper, we review the arguments for and against tenure voting that have been made in the literature. In order to shed light on these claims veracity, we generate the first data base that documents institutional investor portfolio turnover rates for stock. We use this data to inform our mathematical voting model of tenure voting to show how its adoption would affect control rights within the corporation. We make two main findings that shed light on this question. First, we show that when corporate management holds a large block of company stock prior to the implementation of tenure voting, and retains at least 20-30% of the total number of company shares on a long term basis, then tenure voting will insure that corporate managers maintain control of the company even in the face of an attempted change of control transaction by a highly motivated dissident shareholder. Our second important finding is that if corporate management chooses to sell off its large initial block of the company’s stock over time, so that inside ownership levels drop eventually down to a low percentage level with the majority of ownership held by institutional shareholders with different investment horizons, then the use of tenure voting systems does little to protect management control in a proxy contest for corporate control. We conclude that tenure voting does indeed represent an intermediate form of voting control from a managers’ perspective: it does not guarantee management control, as dual-class share structures do, but does give control to management who maintain large equity stakes in the firm. Institutional investors are likely to see it as an improvement over dual-class stock structures in terms of giving them corporate governance rights, although less advantageous to these shareholders’ rights than a one share, one vote voting system.

Who Are the Short-Termists?

Abstract: In this edited version of her keynote address at the Financial Management Association's Annual Conference last October, the author begins by noting that shareholder turnover in U.S. public companies has increased sharply during the past four decades, rising from a low in the mid‐1970s of around 10%—which implies an average holding period of 10 years—to its current level of over 350%, or a holding period of some three or four months. But this increase in average share turnover in recent decades has also been accompanied by a remarkable growth of long‐term investors. In a recent study, the author and two colleagues used quarterly holdings information from Form 13F to identify short‐term investors—which they defined as having annualized turnover rates over 100%, implying a holding period of less than a year—and long‐term investors—those with a turnover rate below 33%, with holding periods longer than three years. Defined in this way, the presence of long‐term institutional investors in the average public company's shareholder base has more than doubled since the early 2000s. What's more, in an attempt to determine whether the market encourages corporate short‐termism by putting too high a discount rate on—and so under‐valuing—earnings or cash flows that are expected to appear in the distant future, the author points to the findings of two studies by others. In the first of the two, an examination of the pricing of a relatively new derivative known as “dividend strips” shows that the implied discount rate for such “incremental” dividends has actually been higher than the rate applied to the long‐term residual value, suggesting that the market undervalues near‐term cash flows relative to more distant ones. The second of the two cited studies reports that companies with high levels of RD and the smaller R&D function becomes more productive, accounting for 15% increases in both new patents and citations during the next three years.

Activist Arbitrage in M&A Acquirers

Abstract: A relatively new activist investor strategy is to purchase shares in the acquirer after an M&A announcement and exercise shareholder rights to change deal terms, or even to block the deal, through public campaigns. We provide new evidence on how the strategy affects target firms and activists' returns. Activists tend to target deals involving defense mechanisms and multiple bidders, and acquirers with a history of low returns on invested capital. By blocking some deals and pushing other acquirers to lower their bids, such an "activist arbitrage" strategy yields significant returns and serves as a governance antidote to value-destroying acquisitions.