Internet Appendix to Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment

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1 Internet Appendix to Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment Alan D. Crane Andrew Koch First Draft: January 14, 2014 May 5, 2016 Crane is at Rice University, acrane@rice.edu. Koch is at University of Pittsburgh, awkoch@pitt.edu. We thank Lauren Cohen (editor), an anonymous associate editor, an anonymous referee, Alex Butler, Kevin Crotty, David De Angelis, Dave Denis, Diane Denis, Ken Lehn, Sébastien Michenaud, Shawn Thomas, Vahap Usyal (discussant), James Weston, and seminar participants at Depaul, University of Pittsburgh, Rice University, and University of Texas Alumni Conference for their helpful comments.

2 In this appendix we report several robustness checks and supplemental results that support the analysis in Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment. The following tables and figures are included in this appendix: 1. Table A1 presents detailed definitions of the variables used in the paper. These include the details on the treatment classification as well as control variables and additional variables of interest. 2. Table A2 presents additional robustness samples for the results in Table 3 of the text. These include a constant composition sample (Panel A) and sample that includes only firms that are at least 5 years old (Panel B). This table shows that our results are not driven by the entry of new firms with different ownership structures, but rather by changes in the ownership structures of existing firms. 3. Table A3 presents robustness to Table 4 of the paper. Panel A of Table A3 is the same specification presented in Table 4, but reports all coefficients that were suppressed for space in the paper. Panel B includes a shorter sample period ( ) to show that the results are not sensitive to the number of years selected on either side of the treatment. 4. Table A4 presents robustness to definitions of ownership concentration and number of larger owners. In the paper, ownership concentration is defined as the concentration of the 20 largest owners and a large owner is defined as one with a position size of 2% or greater. In this table, we replicate the results of Table 3 and Table 4 under different thresholds for each of these outcomes. ˆ Panel A: Replication of Table 3 under four different thresholds of ownership concentration. 1

3 ˆ Panel B: Replication of Table 4 under four different thresholds of ownership concentration. ˆ Panel C: Replication of Table 3 under six different definitions of a large owner. ˆ Panel D: Replication of Table 4 under six different definitions of a large owner. 5. Figure A1 presents the results from placebo regressions. In this figure, we replicate the specification from Table 3 randomizing states to treatment groups. The histograms plot the point estimates and t-statistics from 5,000 randomizations. The vertical red lines show the estimate under the true treatment assignment. 2

4 Table A1: Variable Appendix Variable Definition Ninth Indicator variable equal to one if the headquarters location in 1998 is one of the following: CA,WA,OR,ID,AZ,MT,NV,AK,HI and zero otherwise. Post 1999 Indicator variable equal to one if the observation is after Treatment Interaction equal to Ninth*Post Book Equity Compustat variables ceq+txdb, minus preferred stock, which equals Compustat pstkrv or pstkl or upstk in that order, based on data availability. ln(market Equity) The natural of Compustat variables prcc c*cshpri. ln(market to Book) The natural log of Compustat variables ((prcc c*cshpri)+(dlc+dltt)+pstkl-txditc)/at ) Dividend Payer An indicator variable equal to one if Compustat variables (dvp+dvc) is greater than zero and zero otherwise. ROA Compustat variables (oibdp/at) and winsorized at the 1% level. Annual Return Compounded monthly CRSP returns for the 12 months prior to the reporting period. Institutional Ownership Number of shares owned by institutions (per Thomson-Reuters 13f) as a percent of total shares outstanding. Ownership Concentration Natural log of (ownership of the top 20 owners/(1-ownership of the top 20 owners)). Number of Large Owners Count of the number of institutional owners with positions greater than 2% of the firm s value. State Net Tax Revenue Annual state tax revenue minus subsidies obtained from the Bureau of Economic Analysis. State GDP per Capita Annual GDP by state obtained from the Bureau of Economic Analysis State Unemployment Annual state unemployment obtained from the Bureau of Labor Statistics. State Population Annual state population estimates from Federal Reserve Economic Data. High Vol Indicator variable equal to one if the standard deviation of daily returns over 1998 is in the top quartile and zero otherwise. High Negative Skewness Indicator variable equal to one if the skewness of daily returns over 1998 is in the bottom quartile and zero otherwise. Low Minimum Return Indicator variable equal to one if firm s minimum monthly return in 1998 is in the bottom quartile and zero otherwise. California Indicator variable equal to one if the firm is headquartered in California and zero otherwise. Tech Industry Indicator variable equal to one if the firm s SIC code is one of the following: 2830, 2831, 2833, 2834, 2835, 2836, 3570, 3680, 3681, 3682, 3683, 3684, 3685, 3686, 3687, 3688, 3689, 3695, 7373, 3622, 3661, 3662, 3663, 3664, 3665, 3666, 3669, 3679, 3810, or Ninth Circuit Covariance The sensitivity of firm i s return to a portfolio of Ninth Circuit firms estimated by ri,t = αi + β i M MKTt + β i N Nintht + ɛ i,t and averaged over each firm in the industry. High Ninth Covariance Indicator variable equal to one if the firm s Ninth Circuit Covariance is in the top quartile. Zero CAR Indicator variable equal to one if the firm s 3-day return around the 1999 ruling is within the cross-sectional interquartile range. Connected Owner COj = i owner i in firm j. ω i j C i where Ci is the clustering coefficient of large owner (2%) i and ω i j is the ownership of large 3

5 Table A2: The Effect of Litigation Laws on Ownership This table presents a difference in difference estimation of the effect of the 1999 Ninth Circuit Court of Appeals decision on ownership structure. Each column estimates the effect on a different measure of ownership structure, including Institutional Ownership, Ownership Concentration, and the Number of Large Positions. These variables are defined in Appendix A. Each panel estimates the effect on different samples as indicated in the sub-caption. The main variable of interest, Treatment, is the interaction of two indicator variables, Ninth Circuit and Post Ninth Circuit takes a value of one if the firm is subject to (headquartered in) the 1999 ruling of the Ninth Circuit Court of Appeals and Post 1999 takes a value of one if the observation is after Dividend Payer t 1 is an indicator variable equal to one if the firm the paid a dividend in the prior year, and zero otherwise. Ln(Market Equity) t 1 is the natural log of the lagged dollar market equity value(in millions deflated to 2005 dollars) of the firm and Ln(Market to Book) t 1 measures the natural log of the lag ratio of market value of equity to book value of equity. ROA t 1 is the lagged measure of operating income before interest and depreciation scaled by prior periods total assets. Annual returns measure the compounded monthly returns for the 12 months prior to the reporting period. Standard errors are clustered by firm with t-statistics reported in parenthesis and significance represented according to: p < 0.10, p < 0.05, p < Panel A: Constant Composition Sample Inst. Ownership Ownership Concentration Number of Large Positions Treatment 5.88*** 0.23** 0.77** (3.17) (2.24) (2.45) Ln(Market Equity) t *** 0.37*** 0.82*** (13.09) (8.90) (7.49) Ln(Market to Book) t *** -0.20*** -0.71*** (-5.63) (-3.37) (-4.75) Dividend Payer t *** (-2.89) (-1.48) (-0.76) ROA t ** 0.36** 0.74* (2.19) (2.18) (1.77) Annual Return t (-0.69) (-1.24) (-0.36) State Net Tax Revenue t * (1.09) (0.01) (1.95) State GDP per Capita t (-0.32) (-0.75) (0.51) State Unemployment t (0.92) (-0.36) (0.49) Population t *** (-1.49) (-1.16) (-3.53) Observations Year Effects YES YES YES Firm Effects YES YES YES 4

6 Panel B: Firms Older than 5 Years Inst. Ownership Ownership Concentration Number of Large Positions Treatment 5.83*** 0.19*** 0.78*** (4.53) (2.67) (3.75) Ln(Market Equity) t *** 0.32*** 0.82*** (19.93) (12.62) (13.38) Ln(Market to Book) t *** -0.14*** -0.44*** (-5.31) (-3.90) (-5.31) Dividend Payer t *** (-3.81) (-1.45) (-1.36) ROA t *** 0.36*** 0.65*** (2.85) (3.47) (3.17) Annual Return t (-0.07) (-0.30) (1.25) State Net Tax Revenue t (0.43) (-0.37) (1.41) State GDP per Capita t (-1.17) (-0.42) (-0.13) State Unemployment t (-0.26) (-0.02) (0.84) Population t * *** (-1.80) (-0.80) (-3.62) Observations Year Effects YES YES YES Firm Effects YES YES YES 5

7 Table A3: Difference in Difference Regression: Propensity Matched Sample (Alternative Samples) This table presents a difference in difference estimation of the effect of the 1999 Ninth Circuit Court of Appeals decision on institutional ownership. The regression is estimated on a propensity matched sample. Panel A presents the treatment effect regressions. Each column estimates the effect on a different measure of ownership structure, including Institutional Ownership, Ownership Concentration, and the Number of Large Positions. These variables are defined in Appendix A. The main variable of interest, Treatment, is the interaction of two indicator variables, Ninth Circuit and Post Ninth Circuit takes a value of one if the firm is subject to (headquartered in) the 1999 ruling of the Ninth Circuit Court of Appeals and Post 1999 takes a value of one if the observation is after Dividend Payer t 1 is an indicator variable equal to one if the firm the paid a dividend in the prior year, and zero otherwise. Ln(Market Equity) t 1 is the natural log of the lagged dollar market equity value(in millions deflated to 2005 dollars) of the firm and Ln(Market to Book) t 1 measures the natural log of the lag ratio of market value of equity to book value of equity. ROA t 1 is the lagged measure of operating income before interest and depreciation scaled by prior periods total assets. Annual returns measure the compounded monthly returns for the 12 months prior to the reporting period. Panel B presents the treatment effect estimation over a shorter window, from Standard errors are clustered by firm with t-statistics reported in parenthesis and significance represented according to: p < 0.10, p < 0.05, p < Panel A: Propensity Matched Sample: All Covariates Reported Inst. Ownership Ownership Concentration Number of Large Positions Treatment 6.49*** 0.23*** 0.87*** (4.90) (3.12) (4.14) Ln(Market Equity) t *** 0.34*** 0.74*** (18.86) (12.22) (11.42) Ln(Market to Book) t *** -0.20*** -0.46*** (-5.93) (-4.94) (-4.68) Dividend Payer t *** -0.10** (-3.39) (-2.20) (-1.35) ROA t *** 0.44*** 0.79*** (3.11) (3.69) (3.32) Annual Return t * (1.11) (1.52) (1.77) State Net Tax Revenue t * (0.46) (-0.17) (1.81) State GDP per Capita t (-0.13) (-0.34) (0.11) State Unemployment t (0.53) (0.34) (1.01) Population t *** (-1.42) (-0.92) (-3.46) Observations Year Effects YES YES YES Firm Effects YES YES YES Panel B: Propensity Matched Sample Inst. Ownership Ownership Concentration Number of Large Positions Treatment 3.99*** 0.17*** 0.54*** (3.46) (2.66) (2.82) Ln(Market Equity) t *** 0.31*** 0.60*** (11.43) (8.86) (7.10) Ln(Market to Book) t * (-1.13) (-1.78) (-0.98) Dividend Payer t (-1.24) (-0.84) (-0.56) ROA t ** 0.28** 0.51 (2.44) (2.00) (1.64) Annual Return t (0.51) (0.42) (0.73) State Net Tax Revenue t (-0.54) (-0.51) (0.28) State GDP per Capita t (-0.04) (-1.27) (0.40) State Unemployment t (1.50) (0.85) (0.25) Population t (-0.35) (-0.35) (-1.25) Observations Year Effects YES YES YES Firm Effects YES 6 YES YES

8 Table A4: Difference in Difference Regression: Different thresholds for Large Owners This table presents a difference in difference estimation of the effect of the 1999 Ninth Circuit Court of Appeals decision on institutional ownership. Each column estimates the effect on a different measure of ownership concentration. The dependent variables are defined in Appendix I. The main variable of interest, Treatment, is the interaction of two indicator variables, Ninth Circuit and Post Ninth Circuit that takes a value of one if the firm is subject to (headquartered in) the 1999 ruling of the Ninth Circuit Court of Appeals. Dividend Payert 1 is an indicator variable equal to one if the firm the paid a dividend in the prior year, and zero otherwise. Ln(Market Equity)t 1 is the natural log of the lagged dollar market equity value(in millions deflated to 2005 dollars) of the firm and Ln(Market to Book)t 1 measures the natural log of the lag ratio of market value of equity to book value of equity. ROAt 1 is the lagged measure of operating income before interest and depreciation scaled by prior periods total assets. Annual returns measure the compounded monthly returns for the 12 months prior to the reporting period. Panel A: Baseline Sample - Concentration Concent. of Top 5 Concent. of Top 10 Concent. of Top 20 Concent. of Top 50 Treatment 0.11** 0.14** 0.18*** 0.24*** (2.02) (2.36) (2.90) (3.61) Ln(Market Equity)t *** 0.27*** 0.34*** 0.43*** (10.79) (12.86) (15.15) (18.17) Ln(Market to Book)t *** -0.15*** -0.16*** -0.18*** (-4.74) (-4.87) (-5.04) (-5.50) Dividend Payert * -0.09** (-1.43) (-1.48) (-1.67) (-2.17) ROAt *** 0.37*** 0.42*** 0.45*** (3.53) (4.01) (4.35) (4.47) Annual Returnt ** 0.02** (0.79) (1.55) (2.22) (2.56) State Net Tax Revenuet (-1.16) (-1.04) (-0.76) (-0.39) State GDP per Capitat (-0.05) (-0.20) (-0.39) (-0.78) State Unemploymentt (0.02) (0.09) (0.09) (0.01) Populationt (0.30) (0.17) (-0.00) (-0.34) Observations Year Effects YES YES YES YES Firm Effects YES YES YES YES 7

9 Panel B: Propensity Score Matched Sample - Concentration Concent. of Top 5 Concent. of Top 10 Concent. of Top 20 Concent. of Top 50 Treatment 0.15** 0.18** 0.22*** 0.29*** (2.25) (2.56) (3.04) (3.65) Ln(Market Equity)t *** 0.28*** 0.34*** 0.43*** (8.87) (10.55) (12.37) (14.69) Ln(Market to Book)t *** -0.20*** -0.21*** -0.23*** (-4.73) (-4.93) (-5.09) (-5.33) Dividend Payert ** -0.09** -0.10** -0.12** (-2.20) (-2.10) (-2.15) (-2.43) ROAt *** 0.39*** 0.43*** 0.46*** (2.96) (3.31) (3.58) (3.75) Annual Returnt * (0.51) (1.10) (1.59) (1.87) State Net Tax Revenuet (-0.58) (-0.51) (-0.22) (0.25) State GDP per Capitat (-0.38) (-0.47) (-0.56) (-0.88) State Unemploymentt (0.45) (0.46) (0.43) (0.32) Populationt (-0.34) (-0.45) (-0.67) (-0.99) Observations Year Effects YES YES YES YES Firm Effects YES YES YES YES 8

10 Panel C: Baseline Sample - Number of Positions Num 1% Num 2% Num 3% Num 4% Num 5% Num 10% Treatment 1.31*** 0.59*** 0.28** 0.18* 0.14* 0.04 (4.41) (3.38) (2.34) (1.93) (1.82) (1.34) Ln(Market Equity)t *** 0.83*** 0.41*** 0.24*** 0.16*** 0.03** (21.21) (15.49) (10.26) (7.74) (6.52) (2.54) Ln(Market to Book)t *** -0.41*** -0.29*** -0.25*** -0.22*** (-4.39) (-5.49) (-5.14) (-5.78) (-6.54) (-1.57) Dividend Payert ** -0.20** -0.13** ** -0.04** (-2.23) (-2.16) (-2.05) (-1.51) (-2.21) (-2.22) ROAt *** 0.83*** 0.46*** 0.24** (4.85) (4.07) (3.05) (2.05) (0.93) (-0.63) Annual Returnt *** 0.06** ** -0.01** (3.73) (2.30) (0.52) (-0.74) (-2.41) (-2.58) State Net Tax Revenuet * (1.07) (1.65) (0.54) (-0.17) (-0.65) (0.29) State GDP per Capitat (-1.39) (-0.86) (-0.32) (-0.78) (-0.21) (-0.94) State Unemploymentt (-0.45) (0.41) (1.19) (0.47) (-0.15) (-0.76) Populationt *** -0.09*** -0.05* (-1.64) (-3.68) (-2.71) (-1.89) (-0.79) (0.59) Observations Year Effects YES YES YES YES YES YES Firm Effects YES YES YES YES YES YES 9

11 Panel D: Propensity Score Matched Sample - Number of Positions Num 1% Num 2% Num 3% Num 4% Num 5% Num 10% Treatment 1.64*** 0.87*** 0.45*** 0.27** 0.19** 0.05 (4.43) (4.14) (3.17) (2.36) (2.05) (1.32) Ln(Market Equity)t *** 0.74*** 0.36*** 0.20*** 0.14*** 0.03** (16.49) (11.42) (7.86) (5.85) (5.06) (2.14) Ln(Market to Book)t *** -0.46*** -0.37*** -0.33*** -0.28*** -0.04** (-3.69) (-4.68) (-5.51) (-6.51) (-7.06) (-2.30) Dividend Payert ** -0.07*** (-1.48) (-1.35) (-1.46) (-1.39) (-2.52) (-2.74) ROAt *** 0.79*** 0.49*** 0.28** (4.62) (3.32) (2.68) (2.12) (0.98) (-0.19) Annual Returnt *** 0.06* (2.83) (1.77) (0.47) (0.33) (-1.51) (-1.58) State Net Tax Revenuet * (1.18) (1.81) (0.99) (-0.12) (0.03) (0.20) State GDP per Capitat (-0.56) (0.11) (0.44) (-0.43) (0.17) (0.10) State Unemploymentt * (0.36) (1.01) (1.66) (0.24) (-0.13) (-0.46) Populationt *** -0.12*** -0.06* (-1.50) (-3.46) (-2.73) (-1.68) (-1.27) (0.35) Observations Year Effects YES YES YES YES YES YES Firm Effects YES YES YES YES YES YES 10

12 Figure A1: Placebo Treatment Group Coefficient Estimates and t-statistics This figure presents the results of 5,000 placebo regressions where states are randomly assigned to treatment. Each coefficient and t-statistic is estimated following the specification from Table 3, Panel A. (a) Institutional Ownership Placebo Simulations - Coefficients (b) Concentration Placebo Simulations - Coefficients (c) Number of Large Owners Placebo Simulations - Coefficients (d) Institutional Ownership Placebo Simulations - t-stat (e) Concentration Placebo Simulations - t-stat (f) Number of Large Owners Placebo Simulations - t-stat 11

Institutional Investor Cliques and Governance: Internet Appendix

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