Distracted Shareholders and Corporate Actions Corporate Finance - PhD Course 2017 Stefan Greppmair
Motivation 1. Measuring Distraction A Thought Experiment Car 1 Medicals Car 2 Companies Shareholders Managers of Car
Motivation 1. Measuring Distraction A Thought Experiment Car 1 Medicals Car 2 Companies Shareholders Managers of Car Does not change Actively seeks private benefits Becomes lazy
Executive Summary Main Results Managers act to increase private benefits at the expense of shareholders when distraction is high, exploiting temporarily looser monitoring constraints (identified through exogenous attention shocks) Managers are more likely to engage in value-destroying M&A deals, to grant themselves well-timed stock options, to cut dividends and are less likely to be fired after bad performance Related Literature Role of investor attention in the context of asset pricing, affecting both retail and institutional investors (see Fang, Peress, and Zhen, 2014; Kacperczyk, Nieuwerburgh, and Veldkamp, 2015) Impact of limited attention on corporate actions (e.g. Hirshleifer and Teoh, 2003) The principal-agent problem and the effect of exogenous shifts in monitoring on firm value (Edmans, 2014; Falato, Kadyrzahnova, and Lel, 2014)
Shareholder Distraction 1. Measuring Distraction How to measure distraction? D fq = Firm Investor in last quarter Other w i,fq 1 w IND IND i,q 1 IS q Industries Three main ingredients for the firm-level proxy of distraction: Unrelated industry shocks IS q IND : highest/lowest return across industries other than the firm s own industry in a given quarter importance of shocks for investor w IND i,q 1 : industry weight in investor s portfolio in the previous quarter importance of affected investors as potential monitors w i,fq 1 : weight of firm f in the investor s portfolio & fraction of shares owned by investor 2. Capturing Distraction Source: Kempf, Manconi, Stampf (2016) Regressions include control for fixed effects on the industry, time and firm level Shareholder activism decreases with distraction Proposed measure of distraction is able to capture attention shifts
Empirical Results I Merger Activity The hypothesis is that self-interested managers engage in suboptimal (but privately beneficial) investment behavior when facing looser monitoring constraints M&A provides a good study setting because the timing of the action is at the discretion of the manager and deal announcements are observable in a timely manner Merger Frequency and Performance Source: Kempf, Manconi, Stampf (2016) Regressions include control for fixed effects on the industry, time and firm level Higher likelihood of a merger announcement Merger more likely to be of diversifying nature (beneficial for the manager) Subsequent merger performance is worse when shareholders are distracted (in the short- and long-run)
Empirical Results II Voice or Exit Voice or Exit Managers structure deals such that a shareholder vote is not mandatory Empirically, there is a spike in deals associated with less than 20% newly issued shares in high distraction firms Distracted shareholders are 30% less likely to reduce or liquidate their holdings after a bad deal is announced If managers anticipate this, the disciplining role of an ex-post exit is weaker ex-ante CEO Power Powerful CEOs (relative to the board) are more likely to exploit time-variation in institutional investors distraction amplifying the baseline effect by up to 81% in the presence of a dependent board Monitoring capacities and abilities of institutional investors are important and cannot be easily substituted by other monitoring devices such as strong boards
Empirical Results III Other Corporate Actions and Beyond Test the distracted shareholder hypothesis in other corporate settings which exhibit sufficient time variation, benefit managers but not shareholders, and are management choices Lucky stock option grants, dividend cuts, forced CEO turnover and abnormal stock returns Empirical Results Source: Kempf, Manconi, Stampf (2016) Regressions include control for fixed effects on the industry, time and firm level Higher likelihood of lucky grants and dividend cuts Lower performancesensitivity of forced CEO turnover Lower abnormal return of firms with distracted shareholders (summarizes unobservable actions)
Conclusion Ability to capture exogenous shifts in investor attention in an economically meaningful way Good and consistent story with every part being related to distraction, which makes it hard to explain all aspects at the same time via a single alternative story Thorough testing approach, controlling for all kinds of additional explanations and fixed effects, ruling out a large number of different arguments One counterargument: how unrelated are industries with regard to each other?