Planes y programas de la asignatura Idioma extranjero Inglés en Chile

In this section, we study how connected institutions’ trading contribute to activists’ successes. As Edmans and Holderness (2017) point out, institutional investors pri-

marily exercise their shareholder rights through voting for directors and major cor- porate proposals. Directors receiving a meaningful fraction of negative votes are more likely to step down (Cai, Garner, and Walkling, 2009), and companies often re- spond to negative voting outcomes on other management-sponsored proposals, such as compensation-related ones (Ferri and Maber, 2013). If connected institutions are more ready than non-connected institutions to vote against management in target companies during activist campaigns, this is strong evidence that the activists have built an alliance that can effectively challenge management and potentially improve firm performance and shareholder value.

We study director elections and other management-sponsored proposals, which include executive compensation plans, Say-on-Pay proposals, governance- related proposals, capitalization proposals, and routine and miscellaneous proposals. Together, they account for over 95% of all proposals (Li, 2016).

For mutual funds, we define an indicator variableVote against management proposals that equals one if the fund votes against a proposal sponsored by man- agement, and zero otherwise. Our main dependent variable below represents the percent of funds within an institution that vote against management:

Vote against management proposal = S

X

s

Vote against management proposal_s

(4.2)

in which S is the number of funds within the institution. Vote against director nominee is defined in a similar fashion.

As ISS recommendations are shown to significantly sway institutional votes (Iliev and Lowry, 2014; Cvijanovic, Dasgupta, and Zachariadis, 2016), we also define

ISS against management, which equals one if ISS recommends against management, and zero otherwise. On average, ISS recommends against management proposals 7.5% of the time, while it recommends against management’s director nominees 7.4% of the time. Both percentages are less than the proportion of votes cast by fund families (10%).

We estimate a linear probability model by regressing Vote against manage- ment proposal or Vote against director nominee on Connection to activist, proxies for similarities between instiutitons and activists, and proposal fixed effects and in- stitution fixed effects, which capture time-invariant proposal and institution level characteristics.

Table 4.6: Social connections and shareholder voting during activist campaigns This table examines how connected institutions vote in target firms’ shareholder meet- ings after activist disclosures. Column (1) include shareholder meetings that take place between campaign announcement and outcome dates, while column (2) includes all post- announcement shareholder meetings by target firms. V ote against management proposal (director nominee) is the percent of “Against” votes among all funds within an institu- tion on management-sponsored proposals (director nominees). Connection to activistis a dummy variable equal to 1 if an institution is connected to the activist as of yeart−1 (year tis when the activist discloses its position in the target firm). M eeting during campaign is an indicator equal to 1 if a shareholder meeting is held between campaign announce- ment and outcome dates. All other independent variables are as defined in table 4.2. In each column we report coefficient estimates and their heteroscedasticity-robust t-statistics. Standard errors are clustered at the institution level. ∗, ∗∗ and ∗ ∗ ∗ indicate statistical significance at the 10%, 5% and 1% levels, respectively.

Meetings during activist campaign All meetings after activist announcement Dependent variable Vote against

management proposal Vote against director nominee Vote against management proposal Vote against director nominee (1a) (1b) (2a) (2b) Connection to activist 0.009* 0.013** 0.003 0.004 [1.908] [2.333] [1.344] [1.346]

Connection to activist × Meeting during campaign

0.009** 0.012** [2.265] [2.513] Same city – institution and target -0.003 0.006 -0.005 -0.005 [-0.280] [0.478] [-0.826] [-0.857] Same city – institution and activist -0.001 -0.004 -0.001 -0.001

[-0.223] [-0.587] [-0.416] [-0.202] Portfolio overlap -0.066 -0.076 -0.015 -0.015 [-1.460] [-1.328] [-0.567] [-0.427] Same-size quintile 0.002 0.003 0.000 0.002 [0.354] [0.380] [0.123] [0.577] Observations 101,308 72,634 443,606 320,027 Adj. R-squared 0.483 0.512 0.466 0.503

Proposal FEs Yes Yes Yes Yes

Institution FEs Yes Yes Yes Yes

In column (1) of table 4.6, we report evidence on whether connected insti- tutions are more likely to challenge management in shareholder meetings during activist campaigns. Column (1a) reports that connected institutions’ votes against management proposals are 0.9 percentage point more than those by non-connected institutions. The coefficient estimate is statistically significant at the 10% level. Given that the unconditional disapproval rate of fund families for directors is 10%, this represents an increase in disapproval of 9%.

Column (1b) replicates the analysis in column (1a) for director elections only. Connected institutions’ votes against management-sponsored directors are about 1.3 percentage points more than those by non-connected institutions (significant at the 5% level). This represents an incremental increase in disapproval of 13%.

In column (2), we relate disapproval of management proposals and director nominees with Connection to activist, interacted with Meeting during campaign,

which is an indicator variable equal to one for meetings that take place during activist campaigns. This difference-in-differences (“DiD”) specification compares differential votes between connected and non-connected institutions during cam- paign years with those in years with less activist influence. Note that the regressor

Meeting during campaign and ISS recommends against proposal is dropped due to multicollinearity with proposal fixed effects. 9 The results are similar. The result in column (2b) suggests that during activist campaigns, the difference in “Against” votes for directors between connected and non-connected institutions is about 1.2 percentage points, compared with that in later years with less activist influence. We obtain similar results for all management proposals in columns (2a).

4.4.1 Ownership changes and shareholder voting

Having shown that socially connected shareholders are move likely to challenge management during activism events, we proceed to study the interactive effects of institutional trading and voting. Presumably, connected institutions that purchase target stocks during a campaign are more likely to challenge the management in shareholder meetings because doing so will benefit them more than when they do not increase holdings. Loosely speaking, this is analogous to Cornelli and Li (2002), who explain that a risk arbitrageur “creates” private information after purchasing shares because they are now privately informed about their own voting decisions, which in turn increases the value of the shares by raising the probability of a favourable vote outcome (deal completion). Applying the same framework to an connected institution during an activist campaign, its information advantage lies in the fact it is privately informed about its intention to support the activist (vote against management), which improves the probability of activist success and an increase in stock prices.

9

Table 4.7: Ownership changes and shareholder voting during activist campaigns This table examines how connected institutions vote in target firms shareholder meetings when their ownerships change. The sample includes shareholder meetings that take place between campaign announcement and outcome dates. V ote against management proposal (director nominee) is the percent of “Against” votes among all funds within an institution on management-sponsored proposals (director nominees). Connection to activistis a dummy variable equal to 1 if an institution is connected to the activist as of yeart−1 (yeart is when the activist discloses its position in the target firm). Increase in ownership during activist campaignequals 1 if an institution increases ownership in a target stock from the campaign announcement quarter end to the quarter end before the outcome date, and 0 otherwise. All other independent variables are as defined in table 4.2. In each column we report coefficient estimates and their heteroscedasticity-robust t-statistics. Standard errors are clustered at the institution level. ∗, ∗∗and ∗ ∗ ∗indicate statistical significance at the 10%, 5% and 1% levels, respectively.

Meetings during activist campaign

Dependent variable Vote against management

proposal Vote against director nominee

(1) (2)

Connection to activist 0.003 0.007

[0.548] [1.025]

Connection to activist × Increase in ownership during activist campaign

0.017** [2.494]

0.018** [2.090] Increase in ownership during activist campaign -0.001 0.003

[-0.075] [0.447]

Same city – institution and target -0.003 0.006

[-0.262] [0.484]

Same city – institution and activist -0.001 -0.004

[-0.234] [-0.601] Portfolio overlap -0.067 -0.076 [-1.478] [-1.340] Same-size quintile 0.002 0.003 [0.317] [0.355] Observations 101,316 72,634 Adj. R-squared 0.455 0.512

Proposal FEs Yes Yes

Institution FEs Yes Yes

For this study, we focus on all meetings that take place during activist cam- paigns. Specifically, we regress Vote against management proposal orVote against director nominee on Connection to activist, interacted with Increase in ownership, as well as proxies for similarities between institutions and activists, and proposal fixed effects and institution fixed effects. A positive coefficient on the interac- tion term, Connection to activist×Increase in ownership, indicates that there is a stronger association between social connections and voting against management proposals/director nominees when an institution purchases target stocks during the campaign. As shown in column (1) of table 4.7, connected institutions’ votes against management-sponsored proposals/directors are 1.7-1.8 percentage points more than those by non-connected institutions when the institutions increase investment in the target firms (significant at the 5% level). This represents an incremental increase in disapproval of 17% to 18%.