Journal
of Financial
Economics
11 (1983) 401438.
ON CORPORATE
North-Holland
Publishing
Company
GOVERNANCE
A Study of Proxy Contests*
Peter DODD
University
of Chicago, Chicago, IL 60637, USA
Jerold B. WARNER
University
Received
of Rochester,
October
Rochester,
1981, final version
NY
14627, USA
received June 1982
This paper examines a sample of firms experiencing
proxy contests for seats on their board of
directors. Dissident shareholders
usually fail to obtain a majority of board seats. Nevertheless,
they capture some seats, via mechanisms
such as cumulative
voting, in over half of the sample
contests. Regardless
of proxy contest outcome, positive and statistically
significant share price
performance
is associated
with the contest. That finding is predicted by the standard economic
analysis of proxy contests, in which the challenges benefit shareholders
by improving corporate
performance.
The finding runs counter to the claim of Berle (1962) that the economists’ view of
proxy contests is ‘a wholly imaginary picture’. A portion of the positive share price changes taking
place in the early stages of some proxy contests is not permanent,
however, and as suggested by
Manne (1962) is at least partially attributable
to temporary
increases in the market value of the
vote attached to corporate shares.
1. Introduction and summary
Proxy contests are dramatic events for corporations. They occur when one
group, referred to as ‘dissidents’ or ‘insurgents’, attempts to obtain seats on
the firm’s board of directors currently in the hands of another group, referred
to as ‘incumbents’ or ‘management’. Since some board members are often the
firm’s top officers, the terms incumbent and management are typically used
interchangeably. Proxy contests have clear implications for the incumbent
board, representing a threat to its continued employment and influence in
*Financial support for this research is provided to both authors by the Managerial
Economics
Research Center at the University
of Rochester and to Dodd by the Institute of Professional
Accounting
at the University of Chicago. We are grateful to Gary Tuttle and Stephen Walsh of
the New York Stock Exchange and especially William Chatlos of Georgeson
and Company for
helpful discussions
and for providing
some of the data on which this study is based, and to
Prem Jain for superb computational
assistance. We also thank for their comments on previous
drafts G. Benston, M. Bradley, P. Brown, A. Christie, F. Easterbrook,
E. Fama, R. Hohhausen,
M. Jensen, A. Kleidon, R. Leftwich, J. Long, W. Marshall, W. Meckling, R. Roll, M. Scholes, C.
Smith, R. Stulz, L. Wakeman,
R. Watts, J. Zimmermann,
and the paper’s two referees, W.
Mikkelson and K. Scott.
0304-405x/83/$03.00
0
Elsevier
Science Publishers
P. Dodd and J.B. Warner, Proxy contests
402
the corporation.
The implications
for stockholder
wealth are not so obvious,
however. There are divergent views on this question, but to date there is a
singular lack of empirical evidence.
This paper examines proxy contests among firms listed on the New York
and American
Stock Exchanges
in the years 1962 to 1978. The general
picture that emerges is one of positive share price performance
associated
with election contests for board seats. This result holds both for contests
where the dissidents
fail to capture majority
control of the board and for
those where a majority of the incumbents
are ousted. Such evidence provides
a basis for distinguishing
between competing
alternative
explanations
of
proxy contests appearing in the literature. In addition, another striking result
is discovered:
there is evidence of systematically
negative abnormal
returns
during part of the period following
published
contest announcement
but
prior to published election outcome announcement.
This result is seemingly
inconsistent
with
semi-strong
form
market
efficiency,
and
possible
explanations
for it are explored.
In the next section, the mechanics of proxy contests are outlined. Section 3
discusses
alternative
explanations
of proxy contests,
and their testable
implications.
The sample of proxy contests is discussed in section 4, together
with a brief description
of the methodology
for examining
share price
performance.
The paper’s major results are presented
in section 5, and
considered
in further detail in section 6. Our conclusions
are presented
in
section 7. An appendix contains
a more detailed description
of the paper’s
methodology.
2. Proxy contests: The mechanics
The legal authority
for management
and direction of a corporation
rests
with the board of directors, which is required to supervise the general course
of the business, and to use its powers in the best interests of the corporation.
The board can delegate responsibility
for the day-to-day
operations
of the
company to appointed
officers, and has the right to remove and replace the
officers.’ A proxy contest is a mechanism
by which shareholders
can change
the tit-m’s board. If the board ‘controls’ the firm, then board changes effected
by a proxy contest can represent changes in the control of the firm. There
are two features of the actual proxy contest process whose understanding
will later be useful: the solicitation
of the proxies and the tabulation
of votes.
2.1. The solicitation
of proxies
A proxy contest typically begins in the months prior to the firm’s annual
meeting, at which time a board of directors must be elected by a vote of the
‘For a discussion
of the powers
of the board
of directors,
see Cary (1969)
P. Dodd and J.B. Warner, Proxy contests
403
firm’s stockholders.’
During the contest, stockholders
are asked to select
between two opposing sets of nominees for board seats. The outside group,
the dissidents, initiates a campaign in opposition
to incumbent
management
and solicits votes from stockholders
for its alternative
slate of director
nominees. Both dissidents and incumbents
seek votes from shareholders
in a
manner
similar to a political
campaign.
They forward proxy solicitation
materials to stockholders,
who in turn sign and return the proxy form of the
preferred group, authorizing
the agents nominated
in the form to vote the
shares. The agents for each group accumulate
votes via the returned proxies
and cast these votes at the shareholders’ meeting.
2.2. The tabulation
of votes
The group obtaining
a majority of the votes will generally elect a majority
of the directors. The specific allocation
of directors between incumbents
and
dissidents depends upon the method of voting. The two alternative
methods
in use in the United States are non-cumulative
(or ‘straight’) voting and
cumulative
voting.3
In non-cumulative
voting, each director position is treated as a separate
election. Proxy-holders
are entitled to cast votes, equal to the number of
shares for which proxies are held, for each director
position.
Since the
successful nominee for each position is the one attracting
the majority
of
votes, non-cumulative
voting
usually
precludes
minority
interests
from
electing any directors4
In contrast,
cumulative
voting does permit minority
interests to elect a
minority
of the directors. Proxy-holders
are entitled to cast, in total, votes
equal to the number of shares for which proxies are held multiplied
by the
number of directors. All votes may be cast for a single director position, or
the votes may be distributed
across positions in any way. The nominees from
both incumbents
and dissidents are ranked in descending order according to
the number of votes received, and the required number of directors elected
from this ranking.5
*An annual election is typically required by the mm’s certificate of incorporation
or by-laws.
See Aranow and Einhorn (1968) for a detailed description of proxy contests.
‘The number of directors is typically determined by the company by-laws. The voting method
to be used in a specific election is determined
by both the corporation
laws of the state of
incorporation
and the provisions of the company by-laws or articles of incorporation.
“There is an exception: those holding the majority of votes can concede seats by failing to
nominate candidates
for every position. In the sample of proxy contests discussed below, there
are such cases.
‘The workings of these alternative
voting mechanisms
example, taken from Aranow and Einhorn (1968, p. 331):
can best be illustrated
with a simple
Assume there exists a corporation
with 10,000 shares of stock outstanding.
Control of the stock
is divided 6,500 shares for management
and 3,500 shares for an insurgent
stockholders’
committee.
Five directors
are to be elected, and each group has nominated
five candidates.
P. Dodd and J.B. Warner, Proxy contests
404
3. Proxy contests and corporate control
Proxy contests have been subject to little close scrutiny by economists.
It
is not uncommon
for economists to include proxy contests with mergers and
tender offers and argue that they are initiated when incumbent
management
fails to maximize the market value of the tirm.6 However, with the exception
of Manne (1962,1965), the ‘standard
economic
analysis’ of proxy contests
such as that found in some textbooks is limited, often making no attempt to
differentiate proxy contests from takeovers, or to specify the incentives of the
dissidents to initiate these challenges. A complete theory explaining why and
when proxy contests occur is beyond the scope of this paper. It is possible,
however, to utilize some of the limited discussions
of proxy contests that
have appeared,
together with recent work on the theory of the firm, to
establish a framework for understanding
the possible effect of such challenges
on share prices.
3.1. The corporate
board and the discipline of external
markets
Borrowing
from the analyses
of Alchian
and Demsetz (1972), Posner
(1972), Jensen and Meckling (1976) and Fama (1980), firms can be viewed as
‘legal fictions which serve as a nexus for a set of contracting
relationships
among individuals’.’
Stockholders
are risk-bearers
who provide capital to the
firm, and residual claimants who receive the output remaining after the other
factors have been compensated.
They are concerned
that the inputs are
combined
efficiently and that the outputs are distributed
appropriately.
The
individual
stockholder
is generally not knowledgeable
about the business of
the firm and will have investments
diversified across a number of firms. Thus,
the board of directors serves to oversee and monitor the decision-making
of
Under straight voting, the management
could cast 6,500 votes each for its five candidates,
and
the insurgents
could cast 3,500 votes for each of its candidates.
All live of the management
nominees would be elected. Now, if cumulative
voting was permitted, management
would have
32,500 votes (6,500 x 5) and the insurgents
would have 17,500 votes (3,500 x 5). If each faction
cumulated
its votes properly,
management
should elect only three of its nominees
and the
representation
on the
insurgents
should elect two of its nominees, thereby securing minority
board of directors.
Votes per candidate
Management
Total
votes
Management
Insurgents
32,500
17,500
Insurgents’
nominees
A
B
C
10,835
10,833
10,832
%ee, for example, Hirschleifer (1976, pp. 23&231),
‘Jensen and Meckling (1976, p. 310).
D
G
EF
8,751
Van Horne
nominees
8,749
(1980, p. 587).
H
I
J
P. Dodd and J.B. Warner, Proxy contests
405
professional
managers.
As Fama points out, the board can be made up of
representatives
or agents for each of the various factors but it is usual to find
both top management
and outside directors
(agents of the stockholders)
being included.
Although the board is intertwined
with the management,
it is in principle
required to reorder and replace management
when the firm is being relatively
poorly run. The proxy contest can be regarded as a device to instigate a
change in corporate
management
when the board has failed to respond to
pressure for such a change. Rather than replace only the top managers,
a
successful proxy contest achieves a wholesale change by replacing the board
as well. Furthermore,
it is quite conceivable
that the initiative for the contest
be generated not just by shareholders,
but also by alternative
managers or
directors, from inside or outside the firm, who are unable to convince the
board to dismiss the incumbent
officers. As such, proxy contests represent
another
form by which the managerial
labor
market,
whose role is
emphasized by Fama, operates to discipline corporate managers. In the range
of possible disciplinary
actions, the proxy contest lies somewhere between a
board
dismissal
of management
and an outside
takeover
by another
corporation.
3.2. Testable propositions about observed proxy contests
In the above scenario, as well as in the standard
economic
analysis of
proxy contests, the contests are a way of transferring
corporate resources to
higher valued uses. Thus, it is usually inferred that shareholders’
claims will
be permanently
revalued
upward at the time of a proxy contest.8 That
inference is an important
testable proposition
for this paper to examine.
However,
the analysis
upon which it is based fails to capture
several
potentially
important
aspects of a proxy contest.
First, even if the total value of the board’s and the shareholders’
claims is
increased by a proxy contest, it is not obvious how the ‘gains’ accrue to or
are split by these parties.9
aSee, for example, McKenzie and Tullock (1978, p. 409) or Manne (1962, p. 412). Note that in
Mature’s analysis, part of the upward revaluation
is not permanent,
but is due to temporary
increases in the market value of the vote attached to corporate shares. The testable implications
of Manne’s ‘value of the vote’ analysis are ignored for the moment, but will be discussed in
detail in section 6.2.
9Tf, for example, there is a unique synergy between the managerial
talents of the dissident
team and the assets of the firm, then it is hard to predict the outcome from the bargaining
process involving such a bilateral monopoly.
Note that in the case of dissidents, the possibility
of sharing in the synergy (and earning higher compensation
than that available in the next best
alternative)
would provide an incentive to wage the contest. In the case of shareholders
who
thought their vote would ‘matter’ to the contest outcome, the possibility of getting some of the
benefits from the new management
team via a higher share price - provides a similar
incentive to vote dissidents in. Moreover, while the incentive for ‘small’ shareholders
to vote at
all is not clear, it should be mentioned
that actual contests involve extensive canvassing
of
406
P. Dodd and J.B. Warner, Proxy contests
Second, the whole notion
that the total value of management’s
and
shareholders’
claims increases
has itself been called into question.
Berle
(1962, p. 439) for example, dismisses the view that proxy contests assist in
the efficient channeling
of corporate resources. He argues that proxy contests
are ‘singularly
uninspiring
as a rule . . . and . . . quite obviously
sheer
struggles between two tycoons for power’. Although
the Berle argument
is
not specified in much detail, one interpretation
is that dissidents
merely
compete for the right to run (and extract resources from) a firm whose total
cash flows are independent
of board composition.
If this is the case, and if
dissidents receive the same compensation
as did incumbents,
then the proxy
contest should have no effect on share prices. If anything,
since defending
against a proxy contest involves real resource expenditures
by the tirm, share
prices could actually fall. lo Thus the testable implications
of the Berle view
are quite different than those of the standard
economic
analysis. In the
standard
economic analysis, there is an increase in share prices; under the
Berle view, any change in share prices is negative.
3.3. Unsuccessful
proxy contests
The discussion thus far has presumed that the proxy contest be successful,
and that incumbents
be ousted. This presumption
does not apply to the vast
majority
of proxy contests:
as we shall see below, more often than not
incumbents
retain
a majority
of board
seats. The implications
for
stockholders
in unsuccessful contests are unclear.
The prediction
of the standard economic analysis - that share prices will
exhibit a permanent
increase - could still be borne out if the effect of the
contest is to change the behavior
of management
so as to enhance
the
position of the shareholders.
Such enhancement
could occur for at least two
reasons. First, given mechanisms
such as cumulative
voting, even proxy tights
that fail to win a majority of board seats for dissidents often result in some
seats changing hands. Indeed, we even observe challenges where dissidents do
not appear to seek a majority of seats. If minority representation
is expected
to have a positive impact on the cash flows accruing to (non-management)
shareholders,
then it alone is sufficient for an increase in share prices to take
place. Second,
the fact of a dissident
challenge
could itself serve to
discipline existing management,
even if no seats change hands.”
shareholders
by both dissidents and incumbents,
and an extensive set of SEC Proxy Rules on
such procedures.
In the sample below, for firms with available data the mean proportion
of
shares voted exceeds 80%.
‘OFor a discussion
of the costs of proxy contests, see Aranow and Einhorn (1968, p. 543).
Note that if there are efficiency gains accruing to shareholders
as a result of the contest but the
out-of-pocket
costs incident on them are sufhciently
large, negative share price performance
would also be observed.
“Sharpe
(1981, p. 328) seems to raise this possibility.
407
P. Dodd and J.B. Warner, Prove contests
For the case of unsuccessful
contests,
there are, however,
plausible
alternative
scenarios whose predictions
differ from those just discussed. For
example, if contests where dissidents fail to win a majority are not expected
to change the decisions made by managers, then share prices will fall: there is
no change in the firm’s production/investment
decisions
and incumbents
have used company resources to defend their position. In addition, if, instead
of ‘disciplining’ managers, the dissidents’ unsuccessful challenge is interpreted
as evidence of management’s
future ability to insulate itself from discipline,
then stockholders
suffer a wealth loss,
3.4, Summary
of predictions
To summarize
the testable implications
discussed in this section, what we
have referred to as the ‘standard
economic
analysis’ of proxy contests
predicts positive share price performance
for successful proxy contests, and,
subject to additional
qualifications,
for unsuccessful
contests as well. The
standard
view is described by Berle (1962, p. 438) as ‘a wholly imaginary
picture’. The alternative
views, which ignore the possibility
of increased
efficiency and focus on factors such as the direct costs of proxy contests,
predict negligible or negative share price performance
for both successful and
unsuccessful contests. From our discussion of mechanisms
such as cumulative
voting, it is important
to recognize that the whole issue of defining ‘success’
in a proxy contest is a difficult one. The empirical analysis that follows will
explicitly recognize a wide range of possible contest outcomes.
4. Data and methodology
The sample consists of 96 proxy contests for board seats where the election
was held between July 1, 1962 and January 31, 1978. In 57 contests the firm
was listed on the New York Stock Exchange (NYSE) at the time of the
election, and in 39 contests the firm was listed on the American
Stock
Exchange (AMEX).
4.1. Sources of data on proxy contests
The initial sources of the data are logbooks on proxy contests maintained
independently
by the staff of the NYSE and by Georgeson
and Company, a
proxy
solicitation
firm.”
The logbooks
provide
lists and details
of
solicitations
by non-management
groups. Such solicitations
are referred to as
‘countersolicitations’.
The
sample
of
tights
includes
all
proxy
countersolicitations
obtained from the NYSE and Georgeson
records where
*21nmost proxy contests,
firms. Georgeson
both incumbents
and dissidents hire professional
is the ‘oldest and largest’ such firm. See Elias (196% p. 80).
proxy
solicitation
P. Dodd and J.B. Warner, Proxy contests
408
(1) the countersolicitation
is related to an election contest for board seatsI
and (2) a minimum
of 100 daily observations
on the firm’s common stock
return are available on files of the Center for Research in Security Prices at
the University
of Chicago (CRSP) for the period surrounding
the time of the
proxy contest.14 Several cross-checks
and verification
procedures
indicate
that the NYSE and Georgeson
logbooks
offer fairly complete coverage of
countersolicitation
among Exchange-listed
firms.r5
Additional
information
about
each contest
was obtained
from the
logbooks as well as from articles which appeared in the Wall Street Journal.
First, we attempted to identify the following dates for each contest:
(1) Announcement
date:
the day the proxy contest is first mentioned
in the
Although this date is designated the announcement
date, many contests appear to be already underway
at that time. The
‘late’ nature of contest announcements
will be discussed in section 5.
meeting to elect a
(2) Meeting date: the day on which the shareholders’
board is held.
(3) Outcome announcement date: the day on which the results of the contest
are reported in the Wall Street Journal.
Wall Street Journal.16
Second, available details of the nominated
slates and of shareholders’ votes
were recorded. From this information,
contests were classified according to
whether they involved control or participation,
and according
to outcome.
r30nly about half of the proxy countersolicitations
were related to an election for seats. The
remainder pertain to other contested matters, primarily shareholder
approval of mergers or the
sale of assets. The nature of the countersolicitation
was determined
from the NYSE and
Georgeson logbooks, as well as the Wall Street Journal.
t4The period surrounding
the event is defined later in the paper. Only one firm having an
election contest between July of 1962 and January of 1978 is excluded from the sample due to
failure to meet this data availability
requirement.
r5For example, for the period from 1963 through 1972, abstracts of ‘corporate news’ reported
in the Wall Street Journal Index were examined for virtually every one of the thousands
of firms
on which the WalI Street Journal had reported news items in this lo-year period. For the period
over which this search was conducted,
not a single listed firm for which a countersolicitation
was reported in the Wall Street Journal failed to be on at least 1 of the 2 logbooks. However, as
we will discuss in section 6, the sample of countersolicitations
is potentially
biased because it
excludes those attempts to obtain board seats which are announced
in the Wall Street Journal
but terminated
prior to countersolicitation.
t%ontest
announcements
usually involve the dissidents’ naming of a slate or tiling of Form
14B with the Securities and Exchange Commission;
dissidents are required to tile that document,
giving information
such as their identity and background,
at least 5 days before sending
solicitation
materials to stockholders.
There are also some cases where no slate is yet specified,
and the initial contest mention takes the form of an article such as one on ‘speculation
about a
possible light’, or ‘dissidents will seek seats’. The F&S Index of Corporations and Industries,
which abstracts articles from over 750 financial publications
and trade magazines, was also used
to determine
the date of announcement.
In those few cases where it was established
that the
Wall Street Journal articles were preceded by those in other publications,
the date at which the
published report appeared elsewhere was used.
P. Dodd and J.B. Warner. Proxv contests
409
Following
the standard
jargon
of proxy contests, all contests where the
dissidents proposed candidates
for 50% or more of the available board seats
were classified as control
contests.
Those involving
less than SO”/, were
classified as participation
contests.”
4.2. Characteristics
of the sample contests
4.2.1. The timing of events
The mean and median number of trading days from the first published
mention of the contest in the Wall Street Journal to shareholders’ meeting are
40 and 31; the mean and median number of trading days from shareholders’
meeting to election outcome announcement
are 12 and 3, respectively.18
4.2.2. Class$cation
by type and outcome
Details of the sample contests are provided in table 1. Of the 96 contests,
71 are for control of the board and 25 involve elections for participation.
In
56 (or 58.3%) of the 96 contests, dissidents win at least 1 seat.
In 53 (or 74.6%) of the control contests, incumbents
win a majority
of
available board seats. In 18 (or 25.4%) of the control contests, the dissidents
win a majority.
In addition,
in 27 (or 50.9”/;;) of all control contests where
management
wins a majority,
the dissidents
win some seats, bringing
the
number of sample control contests in which dissidents win at least 1 seat to
45 (or 63.3”/,) of all control contests. The figures for control contest outcomes
are similar for firms with cumulative
and firms with noncumulative
voting.
The average board size for the firms involved in control contests is 9, and
dissidents name candidates for an average of 81% of available board seats.
Participation
contests involve an average board size of 10, and an average
of 26.7’%; of available board seats are sought by dissidents. In 14 (or 56.0x)
of the participation
contests, incumbents
are successful in keeping seats out
of the hands of dissidents, while in the other 11 (or 44%) dissidents win at
least one board seat. In 4 of the 11 participation
contests where dissidents
win seats, they win fewer than the number sought.
“The total number of available board seats is not always equal to the total number of seats.
Five sample firms have classitied directorships,
where the fraction of board seats up for election
in a given year is less than lOOo/O(typically 33”/,); in one such case, dissidents won a majority of
the available board seats but not of total board seats. Since the dissidents had sufficient votes to
eliminate classified directorships,
the firm is considered as if the dissidents had a majority of the
board.
“The
figures for the latter period exclude 9 firms where the announcement
of contest
outcome actually precedes shareholders’
meeting, and where a ‘compromise
slate’ agreed on by
incumbents
and dissidents is announced
prior to the meeting and later elected at the meeting.
For purposes of classification
by outcome, those firms with a compromise
slate are treated as if
there had been an opposition
slate at the time of the election. The outcome is determined
by
examining the initial slates proposed by incumbents
and dissidents, and comparing
them to the
compromise
slate.
P. Dodd and J.B. Warner, Proxy contests
410
Table
The sample
of proxy
contests
Control Contests (i.e., dissidents
in the 1962-1978
seek majority
1
period,
of available
by type, year and outcome
board
(96 events).
seats)
Incumbents:
No. of
contests
Year
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
(thru Jan. 31)
Totals
Win all
seats
Win only
majority
of seats
Lose all
seats
Retain
seats
2
7
6
5
3
8
4
4
3
9
5
4
2
3
4
1
1
1
3
2
2
0
3
0
1
0
5
3
3
0
0
2
0
1
0
3
2
2
3
3
3
0
2
3
1
1
2
2
0
0
0
1
1
0
0
0
2
I
1
0
0
0
0
0
0
0
0
0
0
0
2
1
0
0
0
2
1
1
1
0
0
71
26
27
6
12
some
1
2
1
0
Summary of Control Contest Outcomes
Category
Incumbents
win majority
of seats
Dissidents
win majority
of seats
Dissidents
necessarily
win some seats (but not
a majority)
No. of
contests
Percentage of
sample outcomes
53
74.6%
18
25.4%
45
63.3”<,
4.2.3. The dissidents
Two additional
items, each related to the identity of the dissidents,
are
worth noting. First, the sample proxy contests are often waged by former
‘insiders’: in 37 of the 71 control contests and in 4 of the 25 participation
contests,
published
reports in the Wall Street Journal indicate
that the
dissidents include either former board members, former high ranking officials
of the firm, or both.rg Typically, such individuals
leave the firm after a policy
r9We define a high
executive vice president,
ranking
offtcial as one having the title of president,
senior vice president, or president of a subsidiary.
vice president,
P. Dodd and J.B. Warner, Proxy contests
Table
411
1
(continued)
Participation
Contests (i.e., dissidents
seek minority
of available
board
seats)
Dissidents:
No. of
contests
Year
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
(thru Jan. 31)
Totals
Summary of Participation
Lose all
seats sought
Win all
seats sought
Win less
seats than sought
0
0
0
3
2
1
3
1
0
2
0
2
0
3
0
0
1
3
0
1
2
2
0
3
0
0
1
0
0
0
1
0
0
0
0
0
25
14
0
0
0
1
0
0
0
0
0
0
0
7
4
Contest Outcomes
Category
No. of
contests
Percentages
of
sample outcomes
Incumbents
win all seats
14
56.0”‘1
‘0
Dissidents
win some seats
11
44.0%
dispute with incumbent
directors prior to the contest, and actually initiate
the contest.
The frequent
involvement
of managers
suggests
a close
relationship
between proxy contests and competition
in the managerial
labor
market.
Second, while some proxy contests do involve other firms, the number of
such instances is relatively small, suggesting for the sample as a whole only a
weak relationship
between proxy contests and merger or tender offer activity.
In 16 of the contests, published
reports in the Wall Street Journal indicate
that the dissidents
include (and are ‘led’ by) another firm.”
In only 3 of
2”Similarly,
of all sample contests,
following the shareholders’
meeting.
there
are
18 where
the firm is merged
within
3 years
412
P. Dodd and J.B. Warner, Proxy contests
those cases is an interlirm tender offer made for the firm’s shares in the 120
days preceding the first published reports of a proxy contest. The presence of
either former insiders or another firm appears to have a marked and positive
impact on the likelihood
that the dissidents
will be successful in winning
seats. For example, in 29 of the 37 control contests involving insiders and in
10 of the 12 control contests involving another firm, dissidents win seats. In
contrast,
dissidents
win seats in only 7 of the 23 control
contests
not
involving either insiders or other firms.
4.3. Methodology for examining
contests
The paper’s methodology
in the appendix.
security returns around the time of proxy
is discussed
briefly
here, and presented
in detail
4.3.1. Estimating excess returns for a given sample security
The ‘market model’ is used to adjust for marketwide
factors and for risk.‘l
For a given security j, the abnormal
or excess return
in each of the
t = 1,2,. . ., Tj trading days around the time of the proxy contest is defined as
the ‘residual’ or prediction error,22
where
Rj, = continuously
compounded
R,, = continuously
compounded
index at event day t.
rate of return to security j at event day t,
rate of return to the CRSP value-weighted
The coefficients oij and Bj are Ordinary
Least Squares (OLS) estimates of
the market model from a regression over Lj days surrounding
the ‘J days for
which abnormal
returns are computed.
Subject to the availability
of return
data, for each security the prediction
error PE,, is calculated for each day t
in the period around the time of the contest. This ‘contest period’ is defined
as the period from the 150th day prior to the first contest mention cited in
the Wall Street Journal Index through the 80th day following the election
outcome
announcement
cited in the Wall Street Journal Index; since the
length of the contest period differs across securities, the number of days for
which
prediction
errors
are computed,
T, is firm-specific,
and thus
subscripted
by j. The period of Lj trading days surrounding
the contest
‘ISee Fama (1976, ch. 3, 4) for a discussion of the market model.
22’Residual’ and ‘prediction error’ are used interchangeably
in the following analysis; however,
the prediction errors are not residuals in the OLS sense because they need not sum to zero.
413
P. Dodd and J.B. Warner, Proxy contest.~
period is comprised
of the 150-day period prior
the 150-day period following the contest period.”
4.3.2. Aggregating
to the contest
period
plus
excess returns across time and sample securities
For a given security j, let dlj and dzj designate the calendar days of any
two successive events in the progression
of the proxy contest. For example,
for a given security, dlj could represent
the meeting date, and d,, could
represent the outcome announcement
date. Then the measure of abnormal
performance
of security j between the two dates [that is, for the (d,,-dlj
+ 1)s Tj days beginning
at day dlj through
day dzj] is given by the
cumulative
prediction error,
CPEj=t=p
PE,,.
t=d,j
In the absence
of abnormal
performance,
the expected
value of the
cumulative
prediction error is equal to 0.
For any sample of securities. the number of days between a given set of
events can differ across securities. For example, some securities have 5 days
between shareholders’
meeting and outcome announcement,
and others have
10 days. For a sample of N securities, the measure of abnormal
performance
between two given events is given by the mean cumulative
prediction error,
CPE =;
,i CPE,.
J 1
In the absence of abnormal
performance,
cumulative
prediction error equals 0.24
the expected
value
of the mean
Z3Although the period surrounding
the event is defined to have a maximum of 300 trading
days, for a few firms data is unavailable
for each day in that period; thus, L is also subscripted
by j; L, 5 300.
24The mean cumulative
prediction
error is an estimate of the expected abnormal
return per
security that could be earned on the following strategy:
buy each sample security j at its
respective date dlj and hold through day dzj. Alternative
procedures
for aggregating
residuals
and estimating
this return [such as those based on Ball and Brown (1968) and Dodd (1980)]
were also used, but the specific numerical magnitudes
were typically not notably different from
those reported in the paper for mean cumulative
prediction errors. It is also worth noting that
the paper’s conclusions
do not appear to be highly sensitive to the specific methodology
used to
generate prediction errors. For example, measures of abnormal performance
were also calculated
using the CRSP Excess Returns tile, as well as the Scholes and Williams (1977) procedures,
and
variations
of the Brown and Warner (1980) Mean Adjusted
Returns and Market Adjusted
Returns methodologies.
Again, results similar to those reported
in the paper were obtained.
Finally, to study the properties of both standardized
cumulative residuals and the test statistic 2
in the absence of abnormal
performance,
several types of simulation
procedures
were used. The
results indicated
that the unit normality
assumption
is not unreasonable.
Details of the
simulations
were reported in a previous, unpublished
version of this paper, and will be furnished
on request.
J F.E.
-I’
414
P. Dodd and J.B. Warner, Proxy contests
In the appendix,
a test statistic for the mean standardized
cumulative
prediction
error is discussed. Briefly, in order to derive the test statistic 2,
each security-specific
cumulative
prediction
error is first standardized
to
reflect its respective
estimated
standard
deviation;
each standardized
cumulative
prediction
error is assumed to be distributed
unit normal in the
absence of abnormal
performance.
The test statistic, which is the mean
standardized
cumulative
prediction error multiplied by the square root of the
number of securities, is also assumed to be unit normal.
5. Excess returns around the time of proxy contests
5.1. A broad overview using monthly data
Before moving to an examination
of security price performance
for specific
days around
the sample proxy contests,
it is useful to get a somewhat
broader overview of stock price behavior in the months and years around
the time of the contest. Table 2 shows excess returns for each month from
the 60th month prior to the calendar month in which the proxy contest was
announced,
through the 12th month following contest announcement.25
Two
general conclusions
emerge from the table.
First, there is at best only weak evidence that firms destined for proxy
contests have abnormally
low rates of share return in the years immediately
preceding the contests. In the period from months -23 through -6 relative
to first published reports, the mean cumulative
residual is -0.087, with a Zstatistic of - 1.01. However, in the period prior to that, from months
-60
through
-24, the mean cumulative
residual is actually positive, having a
value of 0.054, with a Z-statistic
of 1.42. 26 These figures certainly do not
provide strong support for the view that proxy contests take place only after
prolonged periods of abnormally
poor share price performance.27
‘%t table 2, the procedures
for calculating
mean cumulative residuals and their corresponding
test statistics are similar to those outlined previously; the observations
are merely on monthly
(i.e., compounded
daily) rather than daily returns,
and the market
model parameters
are
estimated from monthly rather than daily data. The estimation period has a total of 48 months,
and consists
of months
-84
through
-61
and + 13 through
+36 relative
to contest
announcement.
In order to be included in the table, a security must have a minimum of 24
monthly returns in the estimation
period. Although not reported in the table, other estimation
periods (including those involving only post-event data) were also used; the general conclusions
were unchanged.
Note that since the CRSP daily file does not start until 1962, where month
-60 occurs prior to 1962, CRSP monthly data (if available) were used to calculate the residuals
reported in the table.
26Because some securities have missing data, values of the mean cumulative
residual between
these dates differ slightly from the value of the changes in the cumulative mean residual implied
by table 2.
“The absence of dramatic
evidence that the sample firms’ shares performed
poorly in the
years prior to the contest says little about whether the proxy contests arose to replace inefftcient
management.
Any ‘poor management’
that might have led to the proxy contest will be reflected
in a change in share value only to the extent that the poor management
was unanticipated.
Furthermore,
even if a fall had occurred,
it can be difficult to detect abnormal
share price
performance
when its exact time of occurrence is unknown.
P. Dodd and J.B. Warner, Proxy contests
415
Table 2
Monthly
excess returns
associated with proxy contests
time period: 1962-1978).
(sample
size: 96 contests,
Month relative
to contest
announcement
Mean
residual
Cumulative value
of mean residual
-60
-50
-40
-30
-24
-23
-22
-21
-20
-19
-18
~ 17
-16
-15
- 14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
-0.005
0.017
0.006
- 0.000
-0.003
0.006
-0.001
0.005
- 0.008
0.006
-0.021
- 0.020
- 0.002
0.019
0.009
0.008
0.008
- 0.007
-0.019
- 0.026
-0.016
-0.005
-0.006
0.002
-0.013
- 0.006
0.024
0.044
0.016
-0.014
- 0.022
0.018
-0.015
-0.010
0.004
0.005
-0.016
0.011
0.003
0.022
-0.003
- 0.005
- 0.007
0.006
0.063
0.057
0.063
0.062
0.067
0.058
0.065
0.044
0.023
0.020
0.040
0.049
0.057
0.049
0.042
0.023
-0.003
-0.019
- 0.024
- 0.03 1
- 0.029
- 0.043
- 0.049
- 0.024
0.019
0.036
0.022
-0.000
0.018
0.003
-0.006
-0.001
0.003
-0.012
-0.001
0.001
0.024
0.02 1
Second, there is evidence of positive abnormal
stock price performance
in
the months just preceding published reports of the proxy contest. The mean
cumulative
residual for months -5 through 0 is 0.054, with a Z-statistic
of
2.72; the mean cumulative
residual for months -2 through 0 is 0.076, with a
416
Z-statistic
represents
reported
abnormal
remainder
P. Dodd and J.B. Warner, Proxy contests
of 4.47. Moreover, in month - 1, the mean residual is 0.044, which
the highest value of the mean residual for any of the 73 months
in the table. To better understand
the precise timing
of the
performance
and its relationship
to proxy contest activity, the
of this paper uses daily data.
5.2. Daily excess returns around proxy contests:
Overall results
Table 3 provides a summary of daily excess returns around proxy contests.
The table reports cumulative excess returns for the period from 59 days prior
to
contest
announcement
through
the
day
of election
outcome
announcement,
a period with a mean length of 112 trading days. A period
prior to proxy contest announcement
is included in reporting
these overall
results because, as we shall later discuss, there is considerable
evidence that
dissident
activity related to the contests was already underway
for many
weeks prior to actual contest announcement.
The data from table 3 reinforce the general impression gained from table 2
that there is positive abnormal
performance
around the time of the proxy
contest. The mean cumulative
residual for the period from 59 days prior to
contest announcement
through the day of election outcome announcement
is
0.082, with a Z-statistic
of 2.78; the median cumulative
residual is 0.079.
Similarly, if one examines excess returns from the 39th day preceding contest
announcement
through the day of election outcome announcement,
the mean
cumulative
residual is 0.062, with a Z-statistic
of 2.12. Ignoring
for the
moment
the all-important
issue of whether
the positive
share
price
performance
was due to the proxy contest itself, these findings are certainly
consistent
with the standard economic
analysis of proxy contests, in which
the challenges benefit shareholders
by transferring
resources to higher valued
uses.
5.2.1. Excess
returns by contest outcome
From table 3 it also appears that the presence of positive stock price
performance
around
the time of proxy contests is independent
of contest
outcome.
For contests
where dissidents
win seats, the mean cumulative
residual from the 59th day prior to contest announcement
through the day
of election outcome announcement
is 0.081, with a Z-statistic
of 2.05; for
contests where dissidents win no seats, the mean cumulative
residual is 0.082,
with a Z-statistic
of 1.89. For contests where dissidents win a majority, the
mean cumulative
residual
is 0.128, with a Z-statistic
of 1.43; the mean
cumulative
residual for contests where dissidents
fail to win a majority
is
0.077, with a Z-statistic
of 1.68. Thus, increases in share value do not appear
to require that dissidents
gain either a majority
or a positive number
of
board seats.
0 relative
announcement
outcome
“Because of missing data, composition
given in brackets above the columns.
20 following
of sample
~ 0.006
- (0.06)
-0.055
p(2.70)
0.142
(5.12)
0.001
(0.70)
are reported
0.005
(0.02)
- 0.006
-(0.56)
0.052
(1.33)
-0.001
(0.34)
0.063
(1.82)
1251
Participation
changes
slightly
-0.015
-(0.95)
- 0.059
-(2.36)
0.141
(4.76)
0.011
(2.38)
0.081
(2.05)
C561
1962-1978)”
0.018
(0.35)
-0.018
-(1.26)
0.086
(2.23)
-0.014
-(1.67)
0.082
(1.89)
c401
to period.
Win no seats
from period
Win seats
where
time period:
All contests
dissidents:
(full sample size: 96 contests,
Table 3
for which excess returns
-0.003
-(O&t)
0.119
(5.09)
(5) Day 1 through
announcement
contest
0.0008
(0.78)
~ 0.043
-(2.63)
to
0.088
(2.15)
1711
1961
0.082
(2.78)
Control
proxy contests
All contests
(4) Day after contest announcement
through day of election outcome
announcement
(3) 60 days prior to and including
announcement
outcome
(2) Days - 1 through
day of election
in the Wail
(1) 60 days prior to and including contest
announcement
through
outcome announcement
Street Journal
around
in parentheses)
of excess returns
Mean Cumulative Residuals (Z-statistics
Summary
The number
0.008
(0.76)
-0.053
-(1.71)
0.175
(3.23)
-0.007
- (0.20)
0.128
(1.43)
If81
Win
majority
____
where
of contests
- 0.056
-(1.48)
~ 0.056
-(2.14)
0.132
(4.06)
0.004
(0.91)
0.077
(1.68)
1531
Fail to
win majority
Control contests
dissidents:
is
418
P. Dodd and J.B. Warner, Proxy contests
However, the failure to detect significantly different behavior for the
various categories over the entire period from prior to contest announcement
through election outcome announcement
does not imply that contest
outcome was irrelevant to the share price of a given firm. As table 3
indicates, small share price adjustments take place at the time the election
outcome announcement actually appears in the Wall Street Journal, and in a
manner somewhat related to contest outcome.‘* In those contests where the
dissidents win seats, there is positive abnormal performance; the mean
cumulative residual for the two-day period prior to and including the day of
outcome announcement in the Wall Street Journal is 0.011, with a Z-statistic
of 2.38. For those contests where dissidents fail to win seats, there is negative
abnormal performance; the two-day mean cumulative residual is -0.014,
with a Z-statistic of - 1.67.
The indications
of a systematic
relationship
between
outcome
announcement and the direction of share price reaction are not entirely
consistent, however. One puzzle reported in table 3 is that the two-day mean
cumulative residual at the outcome announcement for control contests in
which dissidents win a majority is an undramatic -0.007, with a Z-statistic
of -0.20, for control contests where dissidents fail to win a majority, the
mean cumulative residual is 0.004, with a Z-statistic of 0.91. However, a
more notable pattern emerges when control contest outcomes are examined
in further detail. In about half of all control contests where incumbents
retain control, dissidents won no seats at all; for these contests, the two-day
mean cumulative residual is -0.014, with a Z-statistic of - 1.47. When the
control contests where dissidents fail to win a majority but won seats are
aggregated with those where dissidents did win a majority, the two-day mean
cumulative residual is 0.010, with a Z-statistic of 1.99.
The relatively small size of the various share price adjustments at election
outcome announcement
indicates that any ‘good news’ associated with
winning seats and any ‘bad news’ associated with failing to win seats is
largely anticipated. In no case does it seem that the actual winning of either
seats or of control by dissidents is associated with a fall in share prices, and,
if anything, the result for contests where dissidents win seats indicates a
slight positive effect. Nor does the failure to win seats or control result in a
rise in stock prices, and, if anything, the opposite effect is found. The
evidence is certainly consistent with the view that dissident participation on
the board was expected to enhance the cash flows accruing to
nonmanagement shareholders. Even if the fact of a challenge to management
is one source of the share price changes around the time of the contests, it is
not the only source, and the contest outcome itself does appear to be of
some consequence.
28Similar results to those reported
here
meeting to election outcome announcement
cumulative residuals are studied.
apply when
is examined,
the entire period
or when median
from shareholders’
(rather than mean)
P. Dodd and J.B. Warner, Proxy contests
5.2.2. Overview
of the remainder
419
of the paper
Fig. 1 displays cumulative
values of the mean daily residual for the 120day period from 59 days prior to initial contest announcement
through 60
days following initial contest announcement.
The remainder
of this paper is
concerned with two important
issues suggested in fig. 1, as well as table 3.29
The first issue is the abnormal
performance
prior to and at initial proxy
contest announcement.
The mean cumulative
residual reported in table 3 for
the 60-day period prior to and including contest announcement
is 0.119, with
a Z-statistic of 5.09. These figures give an even stronger indication
of positive
abnormal
performance
around
the proxy
contest
than
those already
discussed. However, from fig. 1, the abnormal
returns generally do not occur
at actual contest
announcement;
whether
or not the pre-announcement
abnormal
returns can be attributed
to the proxy contest, and how these
abnormal
returns differ across contests, is investigated
in section 5.3.
-30
0
+30
DAY RELATIVE TO
INITIAL PROXY CONTEST ANNOUNCEMENT
Fig. 1. Cumulative
mean residual for 120 days around
initial proxy
(sample size: 96 contests, time period: 1962-1978).
contest
announcement
The second issue is related to share price performance
following
contest announcement.
Fig. 1 indicates
an abnormal
fall in share
between contest announcement
and election outcome announcement,
initial
prices
with
29Fig. 1 does not correspond
exactly to table 3 because not all contests have 60 days between
initial announcement
and election outcome announcement.
Also, a few contests have missing
data for some days, so values of the mean cumulative residual and cumulative mean residual can
differ.
420
P. Dodd and J.B. Warner, Proxy contests
the mean cumulative
residual between the two dates having a value in
table 3 of -0.043, with a Z-statistic
of -2.63. Thus, some of the dramatic
pre-announcement
positive
share price increases
were only temporary.
Possible reasons for that finding are the subject of section 6.
5.3. The behavior of returns prior to and at contest announcement:
relationship to contest activity
5.3.1. The cross-sectional
distribution
ofpre-announcement
Details and
excess returns
Table 4 presents a detailed picture of excess returns in the period prior to
and including the day on which announcement
of the proxy contest appeared
in the Wall Street Journal. 3o Examination
of the cross-sectional
distribution
of company-specific
cumulative
residuals
suggests that positive abnormal
performance
is a sample-wide
phenomenon.
As table 4 indicates, the median
cumulative
residual
for days
-59
through
0 relative
to contest
announcement
is 0.133, and 77% of the 60-day cumulative
residuals
are
positive. 31 The 0.1 and 0.2 fractiles of the cross-sectional
distribution
of
standardized
cumulative
residuals
have values
of -0.36
and
-0.12,
respectively;
these values are considerably
higher than the values of - 1.29
and -0.86 for the 0.1 and 0.2 fractiles of a unit normal distribution,
which is
the distribution
from which the standardized
cumulative
residuals should be
drawn in the absence of abnormal
performance.
Moreover, only 2 of the 87
standardized
cumulative
residuals fall in the lower 20% tail of a unit normal,
far fewer than the expected number of 17.4.
High abnormal
performance
also occurs regardless
of eventual
contest
outcome.
Those control contests where dissidents
win a majority
have a
mean cumulative
residual of 0.175, with a Z-statistic
of 3.23, in the period
from day -59 through day 0; those control contests where the dissidents fail
to win a majority have a corresponding
60-day mean cumulative
residual of
0.132, with a Z-statistic
of 4.06. If instead
one compares
the 60-day
cumulative
residuals
for
all contests
(including
both
control
and
participation)
where (1) dissidents
win seats and (2) dissidents
fail to win
seats, similar conclusions
also apply. The 60-day mean cumulative
residuals
for the two groups are 0.141, with a Z-statistic
of 4.76, and 0.086, with a Zstatistic of 2.23, respectively.32
30The table excludes 9 of the 96 contests. In 4 cases, no mention of the contest appeared until
the shareholders’
meeting; in 5 cases, continuous
return data are unavailable
prior to first
contest mention.
a’If the expected
proportion
of positive
cumulative
residuals
is 0.5, then the sample
proportion
of 0.77 has a sign test value of 4.9, which is significant at the 0.01 level using a onetailed test.
“Although
not reported
in table 4, the conclusion
of positive abnormal
performance
also
applies to various subsamples
when broken down into even finer detail. For example, control
contests were partitioned
into those where dissidents (1) win all seats, (2) win a majority but not
all seats, (3) lose a majority but win some seats, and (4) lose all seats; participation
contests were
partitioned
into those where dissidents (1) won seats, and (2) failed to win seats.
0
~ 1 through
0.052
(3.14)
0.003
(0.86)
0.034
(3.34)
0.015
(2.87)
0.012
(2.52)
0.039
(4.46)
0.012
0.012
-0.00001
residuals
0.018
(3.12)
0.048
(4.03)
0.141
(4.76)
0.003
(0.17)
0.024
(2.12)
0.086
(2.23)
c351
Win no seats
where dissidents:
above the columns
Win seats
~521
cumulative
0.133
0.496
0
0.5
Type and Outcome
All contests
by Contest
-0.91
-0.36
- 1.29
0.1
and standardized
data is given in brackets
0.052
(1.33)
0.142
(5.12)
with available
P-4
1651
P71
of contests
Participation
Control
0.119
(5.09)
residuals
in parentheses)
residuals
All contests
“In panel B the number
‘From table 3.
0
through
-9
Ob
through
-59
0
of cumulative
0
Residuals (Z-statistics
Cumulative residualh
Standardized
cumulative
Unit normal
distribution
0
through
-1
-1
0.339
1.43
1.29
0.9
(days
Fail to win majority
l501
0.132
(4.06)
0.020
(2.16)
0.015
(2.46)
ll51
0.175
(3.23)
0.082
(3.00)
0.015
(1.46)
contests
71
77
50
in the Wall
where dissidents:
0)
<I
1”
/ positive
through
is tirst announced
Win majority
Control
-59
2.52
3.75
-0.17
5.09
1.24
4.03
3.62
-40
-20
0
0.119
0.015
0.055
0.048
through
through
through
through
-59
-59
-39
-19
1.00
0.024
- 120 through
-60
Z-statistic
Mean cumulative
residual
Day(s) relative to first
contest announcement
Frequency
Mean Cumulative
Table 4
on common stock of firms having proxy contests, where day 0 is the date the contest
Street Journal (full sample size: 96 contests, time period: 1962-1978)”
with Available Data (N 5 87)
daily excess returns
Sample of Contests
Day(s) relative
to first contest
announcement
Panel B:
Panel A:
Pre-announcement
P. Dodd and J.B. Warner, Proxy contests
422
Although a detailed examination
of the cross-sectional
distribution
of preannouncement
abnormal
performance
is entirely consistent
with the view
that virtually
all contests
result in share price increases,
the finding of
positive abnormal
performance
prior to contest announcement
could merely
indicate that firms subject to proxy contests happened
to have performed
unusually well prior to the beginning of the contests. However, several pieces
of evidence suggest a contemporaneous
association
between the positive
abnormal
returns and the proxy contests themselves.
5.3.2. The concentration
of excess returns around contest announcement
The pre-contest-announcement
abnormal
returns
are not uniformly
distributed
throughout
the 60-day period prior to contest announcement.
Most, if not all, of the abnormal
performance
occurs between day -39 and
day 0, with the mean cumulative
residual for that period having a value of
0.105, with a Z-statistic
of 5.40. Some of these excess returns occur in the
days just before actual publication
of a contest announcement.
For all
sample contests,
the mean cumulative
residual
for days -9
through
0
relative to contest announcement
is 0.039, with a Z-statistic of 4.46. As panel
B of table 4 indicates, in the case of participation
contests, which constitute
about one-fourth
of the sample, virtually all of the pre-announcement
excess
returns occur in the 10 days prior to and including
contest announcement;
the lo-day mean cumulative
residual for these contests is 0.052, with a Zstatistic of 3.14.
In addition,
there appears to be a small stock price effect at contest
announcement.
For days - 1 through 0 the mean cumulative
residual for all
proxy contests is 0.012, with a Z-statistic
of 2.52. The abnormal
performance
appears to be concentrated
at day - 1; there, the mean residual has a value
of 0.012, which is the maximum
value it takes on in any day from - 120
through 0.33 At day 0, the mean residual of -0.00001
is not significantly
different from 0. If the information
which is reported
in the Wall Street
Journal on day 0 became known to the market prior to the close of trading
on day - 1, then the concentration
of any sample abnormal
performance
at
day - 1 would be expected.
5.3.3. Evidence on the late reporting
From
an understanding
of contest activity
of the timing
of proxy
contest
activity,
there is a
33The high values reported
for the mean residuals cannot be attributed
to a few postttve
is 0.004, which is highly statistically
outliers.
For example,
the median day -1 residual
significant: in a previous version of this paper, we discussed our use of simulation procedures
to
construct the sampling distribution
of the median residual. In general, the sampling distribution
of the median daily residual was found to be approximately
normal and to have considerably
smaller standard
deviation
than that of the mean daily residual. In the absence of abnormal
performance,
a daily median residual in excess of the 0.004 value reported in table 4 for day - 1
would occur with roughly probability
0.01 in a sample of the size reported in table 4.
P. Dodd and J.B. Warner, Proxy contests
423
priori reason to believe that on the day of contest announcement
in the Wall
Street Journal, dissident
activity related to the proxy contest had already
been underway
for some time, and that any contest-related
excess returns
could precede actual contest announcement.
For example, in a treatise on the
legal and institutional
aspects of proxy contests, Aranow and Einhorn (1968,
pp. 15-16) indicate that the mechanics of the proxy contest involve both the
organization
of the dissidents’
team
of experts
(including
lawyers,
accountants,
public relations
personnel,
and professional
proxy solicitors)
and the preparation,
filing, and dissemination
of solicitation
material.
In
discussing
the time-table
of the dissident campaign,
they indicate that to
accomplish these activities, ‘experience has shown that a contest must usually
be started at least three months . . (or in excess of 60 trading days) . . .
cannot avoid
before the stockholders’
meeting’,34 and that ‘the insurgents
leaving clues to the coming contest’.35 However, for the sample contests, the
median number
of trading days from contest announcement
in the Wall
Street Journal to shareholders’
meeting is 31; 30 of the sample contests have
fewer than 20 trading days between contest announcement
and shareholders’
meeting, and only 22 of the 96 contests have more than 60 trading days
between contest announcement
and shareholders’
meeting. On this basis, for
a vast majority
of sample contests
it seems likely that events in the
progression
of the contest have already taken place at published
contest
announcement.
An examination
of the details of the actual contest announcements
in the
Wall Street Journal lends additional
credence to the suspicion that published
contest reports are ‘late’ relative to the start of dissident activity. For 20
contests,
or about
one-fifth
of the sample,
the contest
announcement
indicates previous, unreported,
contest-related
activity.36 Assuming that the
reporting in an announcement
is accurate but incomplete
in giving details of
the contest’s background,
the figure of one-fifth is a lower bound on the
fraction of sample contests where we know with probability
1 that dissident
activity took place prior to contest announcement.
5.3.4. Implications
of late reporting jbr interpreting
observed e.xcess returns
Given the strong indications
of late reporting,
it is quite plausible
that
unusual share price behavior related to the contest would be observed during
the 40- to 60-day period prior to actual announcement.
Furthermore,
not all
34Aranow and Einhorn (1968, p. 17).
35Aranow and Einhorn (1968, p. 126).
361n 7 cases, countersolicitation
was reported to have already begun. In another 7 cases, there
had been negotiations
with management,
and offers of seats in 2 of those cases. In 3 cases, there
was a lawsuit related to the contest, and in 1 case a dissident demand for a shareholder
list had
been presented
to management.
In another
2 cases, it was reported
that an unusually
large
number of afIXated dissidents (32 and 10, respectively)
simultaneously
indicated
to the SEC
their intent to countersolicit,
suggesting
significant
previous dissident activity in planning
a
campaign.
424
P. Dodd and J.B. Warner, Proxy contests
sample contests even have positive abnormal performance extending as far
back as 40 or 60 days relative to contest announcement. As we already
discussed, in the case of participation
contests, all of the abnormal
performance seems to take place in the lo-day period prior to contest
announcement. In addition, not all of the control contests have abnormal
performance as far back as day -59. For example, the control contests were
broken down into two subsamples, formed on the basis of the information
contained in the initial published report. Contests were put into the first
subsample if, on the basis of the information reported in the actual contest
announcement, the announcement appeared to be ‘early’ relative to the start
of dissident activity; 14 contests were treated as having been reported early,
and these typically involved a background article on ‘speculation about a
possible proxy tight’. For 51 control contests, the initial announcement was
classified as ‘late’, and generally involved the actual naming of a slate or
formal launching of a campaign. Although both subsamples had similar
cumulative excess returns as of day 0, those contests reported early had
virtually all of their excess returns in the 20- to 25-day period prior to
contest announcement. For those control contests reported late, the excess
returns seem to occur throughout the 40-day (and possibly the 60-day)
period prior to contest announcement. Thus, in addition to the participation
contests, some control contests have excess returns in only the few weeks
prior to contest announcement. Coupled with our a priori knowledge of the
timing and mechanics of proxy contests, such findings cast doubt on the view
that the pre-announcement
excess returns bear no relationship to proxy
contest activity; indeed, the relationship appears to be strong.
Furthermore, attempts to link a portion of the excess returns to some
obvious alternative sources failed. For example, the figures reported in
table 4 are similar for contests where dissidents include another firm and
those which do not. Thus, merger activity will not explain our results. Nor
do the sample firms seem to be characterized by unexpectedly good earnings
during the pre-announcement period: there are 50 sample contests where a
quarterly earnings announcement appeared in the Wall Street Journal in the
60 days prior to contest announcement. For these contests, we conducted a
separate ‘event study’ for the days around the earnings announcement. There
was little evidence of non-zero average share price reaction, and the general
results from table 4 are similar for firms having and those not having
earnings announcements. The notion that the sample firms were doing
(unexpectedly) well for reasons unrelated to the proxy contest is, at this
point, without empirical support.
6. Further evidence on negative excess returns between contest announcement
and election outcome announcement
As indicated
earlier, there is negative
abnormal
performance
between
P. Dodd and J.B. Warner, Proxy contests
425
contest
announcement
and election
outcome
announcement;
the mean
cumulative
residual reported
earlier in table 3 between the two dates is
-0.043, with a Z-statistic
of -2.63. Further details of the negative abnormal
residual
performance
are given in table 5. 37 Not only is the mean cumulative
negative for the period from contest announcement
through election outcome
announcement,
but the median cumulative
residual takes on a similar value,
-0.052,
and only 32% of the cumulative
residuals
are positive.
The
abnormal
performance
seems to be concentrated
among the control contests.
For those contests, the mean cumulative
residual is -0.055, with a Z-statistic
of -2.70, compared
to a mean cumulative
residual of -0.006,
with a Zstatistic
of - 0.56, for participation
contests.
The negative
abnormal
performance
characterizing
the control contests seems to occur regardless of
eventual
contest outcome:
those contests where dissidents
win a majority
have a mean cumulative
residual of -0.053,
with a Z-statistic
of - 1.71;
those contests
where dissidents
fail to win a majority
have a mean
cumulative
residual of -0.056, with a Z-statistic of - 2.14.
Taken at face value, the pervasive nature of these negative excess returns
suggests that shares of firms involved in proxy contests were systematically
overpriced
at the time of contest announcement,
and that an abnormal
return could have been earned, on average, by selling short a firm’s shares at
the time a contest is announced,
and covering the short sale at outcome
announcement.
Possible explanations
for this seemingly unusual finding are
now explored, We are able to at least partially account for the finding.
6.1. Sample selection bias
The sample of proxy contests
includes
only firms where there is a
countersolicitation;
the sample does not include firms where a proxy contest
is announced,
but later cancelled
prior to countersolicitation.
Thus, the
sample behavior
reported
earlier is not necessarily
representative
of the
behavior of all firms having an announcement
of a dissident attempt to gain
board seats. To collect a sample of cancelled proxy contests, for the years
1963 through
1972 every corporate
news item abstract in the Wall Street
Journal Index was examined. This procedure yielded 28 cases of listed firms
where
a dissident
attempt
to gain
seats
was
reported
but
no
countersolicitation
materialized.
In 17 such cases, the dissidents subsequently
“Table
5 excludes 7 contests; 4 have a missing contest announcement
date, 3 have missing
return data during the contest announcement
to outcome announcement
period, and 1 has no
election outcome announcement.
Although
not reported in table 5, the precise timing of the
negative abnormal
performance
has been studied in considerable
detail. The negative abnormal
performance
is not uniform throughout
the period from contest announcement
to election
outcome
announcement,
and appears to occur only between contest announcement
and the
shareholders’
meeting. The negative abnormal performance
is not markedly ‘spiked’ at particular
days immediately
following contest announcement
or immediately
preceding
the shareholders’
meeting, and appears to occur regardless of the length of time between the two dates. Details
will be furnished upon request.
-2.63
32
54
Z-statistic
y0 positive
cumulative
residuals
Mean number
of days
59
28
-2.70
-0.055
- 0.062
1671
Control
with available
- 0.043
“The number of contests
‘From table 3.
- 0.052
Mean cumulative
residualb
C891
All contests
from the day after proxy
Median cumulative
residual
Excess returns
37
40
-0.56
- 0.006
-0.025
1221
Participation
announcement
data is given in brackets
contest
Table 5
outcome
44
34
-1.26
-0.018
- 0.037
c351
Win no seats
where dissidents:
above the columns.
60
29
-2.36
- 0.059
~ 0.053
c541
Win seats
All contests
through the day of election
period: 1962-1978)”
contests
(full sample
56
25
-1.71
-0.053
- 0.043
1161
Win majority
Control
announcement
60
29
-2.14
-0.056
- 0.062
l5ll
Fail to win majority
where dissidents:
size: 96 contests,
time
P. Dodd and J.B. Warner, Proxy contests
427
abandoned
their attempt to get representation
without gaining any seats; in
11 cases, dissidents reached a compromise
with incumbents,
and, as part of
the compromise,
did receive seats. In one such case, dissidents
obtained
a
majority of board seats.
Table 6
Excess returns for 28 cases in the 196331972 period where a dissident attempt to gain seats is
reported in the Wall Street Journal but countersolicitation
does not subsequently
take place.
Day(s) relative to initial announcement
of dissident activity
Mean cumulative residuals
(Z-statistics in parentheses)
- 120 through
-0.043
- (0.68)
-60
-59
through
0
0.086
(2.67)
-29
through
0
0.104
(3.86)
-1
through
0
0.015
(2.34)
Day after announcement
through day of outcome
(i.e. contest cancellation)
Mean cumulative
Z-statistic
Median
Days following
1 through
20
-0.053
-2.24
residual
cumulative
Mean number
of dissident activity
announcement
residual
outcome
- 0.084
47
of days
announcement
Mean cumulative residual
(Z-statistic in parentheses)
- 0.043
-(1.59)
Table 6 reports excess returns for the sample of firms for which there is an
attempt to gain seats that is terminated
prior to countersolicitation.
As in the
case
of countersolicitation,
there
is evidence
of positive
abnormal
performance
prior to and at the time of contest announcement
(i.e., first
published
reports of dissident
activity).38 Over the 30 days prior to and
including the day of first published reports, the mean cumulative
residual is
0.104, with a Z-statistic
of 3.86. In the period including both the day of and
38First published reports of dissident activity for cancelled proxy contests arc similar to those
for the sample of countersolicitations.
The reports generally involve the naming of a slate,
dissidents’ filing of Form 14B with the SEC, statements
by dissidents that seats will be sought,
or an article on ‘speculation about a possible fight’.
428
P. Dodd and J.B. Warner, Proxy contests
the day before first reports, the mean cumulative
residual is 0.015, with a Zstatistic of 2.34.
In addition,
for cancelled
proxy contests there is evidence of negative
performance
between
contest
abnormal
announcement
and
the
announcement
of contest cancellation. 39 The mean cumulative
residual in
that period
is -0.053,
with a Z-statistic
of -2.24,
and the median
cumulative
residual is -0.084. 4o This result indicates that our earlier finding
of negative
post-contest-announcement
returns
is not caused by sample
selection
bias. The analysis
of cancelled
contests
only reinforces
the
impression that the negative returns are a systematic phenomenon.
6.2. Changes in the ‘value of the vote’ around the record date
Manne
(1962) argues that during
a proxy contest,
there will be a
temporary
increase in the firm’s share price due to an increase in the market
value of the vote attached to corporate shares. Because the right to vote has
special value to the contesting
factions, when a contest materializes
those
shares already held by the contesting
factions can be purchased
only at a
higher price than the without-vote
price. Similarly,
since the contesting
factions often purchase additional
shares,4’ the price they are willing to bid
for those shares is higher than the without-vote
price. Thus, so long as the
number of shares held by parties who do not value the right to vote (and
who are willing to part with their shares for the without-vote
price) is small
relative to the increase in the demand to hold shares, the price of shares
should rise when a proxy contest materializes.
However, the price of shares
should also fall when the right to vote in the contest ceases to be of
importance.
If this decline in the value of the vote takes place in the period
between contest announcement
and election outcome announcement,
it could
account for the negative excess returns that were observed in that period.
Two points about the linkage between the value of the vote and the
negative excess returns should be recognized. First, it is not required that the
contesting
factions actually
purchase
shares in order for share price to
increase, or for them to cease purchasing
shares for the share price to
decrease. For example, if at the time the contest is announced
there is simply
an increase in the probability
of share purchase by the contesting factions (at
a premium above the without-vote
value of the shares), then the stock price
%I
8 cases, no outcome
announcement
appeared
in the Wall Street Journal prior to
shareholders’
meeting; however, the outcome itself was typically known as of the shareholders’
meeting, as indicated by published reports of the meeting and subsequent
published accounts of
the firm’s activities. In table 6, for firms lacking a published outcome announcement
prior to the
meeting, the meeting date is substituted for the outcome announcement
date.
40Although
not reported in table 6, the various pre- and post-announcement
results apply
regardless of contest outcome.
41See Aranow and Einhorn (1968, p. 388; see also pp. 20-21).
P. Dodd and J.B.
Warner,Proxy contests
429
should rise immediately
to reflect the possibility.42
If, in the period between
contest announcement
and election outcome announcement,
the probability
of additional
share purchases falls, so should the stock price.
Second, if there exists a predictable
fall in share prices between contest
announcement
and election outcome announcement,
and if the fall is due to
the eventual decline in the value of the vote implicit in the share price, then
no profit opportunity
from short-selling
is necessarily implied. Parties who
held shares and chose not to sell them because they valued the ‘dividend’
conveyed by the right to vote could demand compensation
from traders who
wanted to borrow the stock in order to short-sell it at contest announcement.
Thus, any apparent profit opportunity
suggested by the predictable fall could
be illusory because it does not reflect the amount of such compensation,
and
ignores the issue of from whom and on what terms a trader can borrow the
shares in order to short-sell them.
6.2.1. Testing the value of the vote hypothesis
One test of the argument that the observed negative excess returns are due
to declines in the value of the vote is to examine abnormal
returns around
each contest’s respective ‘record date’.43 Shares purchased
after the record
date can only be voted under special circumstances,
such as the case where
the purchase of shares was made contingent
on the transfer of the seller’s
for transferring
the right to vote involve
right to vote. 44 If such arrangements
transactions
costs that are not borne prior to the record date, then the
record date is a potentially
important
one after which the likelihood
of
additional
share purchases
declines. 45 In that case, negative excess returns
should be observed at the day after the record date, and possibly thereafter if
the probability
of share purchase declined further in the period following.
From table 7, the day after the record date does appear to be of some
significance.46
For the 42 contests with available data and where the record
421t is not even required that there be any expectation of share purchase by the contesting
factions for the share price to rise. If the right to vote in the election has some value to all
parties already holding shares at the time the contest becomes likely, shares can be purchased
from those parties only at a higher price than the without-vote
price.
43Negative excess returns around the record date were suggested
by Manne (1962, p. 412,
fn. 39), who noted such a phenomenon
in the 1961 Allegheny Corporation
proxy fight, and who
discussed the relationship
of that finding to his hypothesis
that the right to vote shares has a
market value.
44Aranow and Einhorn (1968, p. 388).
45Exchange personnel, brokers, and lawyers have suggested to us that, in a transaction
on the
stock exchange, the transfer of the right to vote after the record date is ‘somewhat impractical’
or ‘very difftcult’. However, even if that alternative is very costly, the possibility of a private sale
exists and is sometimes used. Thus, the record date is not a strict cut-off date for acquiring the
right to vote shares. Moreover,
after the record date, share prices in transactions
on the
exchange
should continue
to reflect any value of the vote premium
still available
through
alternative arrangements.
‘“Record dates for table 7 were obtained from the NYSE and AMEX Weekly Bul/etin,~.
P. Dodd and J.B. Warner, Proxy contests
430
Table I
Excess
returns
around
the record date for firms having proxy
contests, time period: 1962-1978).
contests
(full sample
size: 96
Mean Residuals and Mean Cumulatiue Residuals (Z-statistics in parentheses)
Contests
Day(s) relative
record date
to
-9
through
-5
-4
through
0
where the record
Precedes (or coincides
contest announcement
-0.011
- (0.80)
with)
date:
Follows contest
announcement
0.001
(0.15)
0.017
(1.69)
-0.011
-(1.30)
+1
- 0.0003
- (0.49)
-0.014
-(3.02)
+2
0.005
(0.55)
-0.010
-(2.62)
0.019
(1.64)
- 0.036
-(3.68)
1 through
5
6 through
10
-0.011
-(0.21)
-0.017
-(1.73)
Excess Returns Between Contest Announcement and Election Outcome Announcement
Mean cumulative
residual
- 0.028
-0.061
Z-statistic
- 1.42
-2.35
-0.051
-0.053
Median
residual
cumulative
Number of contests
with available data
47
42
Mean number
days
36
15
of
date follows contest announcement,
the mean residual at the day after the
record date is -0.014, with a Z-statistic of -3.02, and the median residual is
-0.012.
Furthermore,
for those contests,
the mean residual
at day + 1
relative to the record date has the smallest value of any day from the 20th
day prior to the record date through the 20th day following the record date.
Thus, even given the prior knowledge that for these contests the day after the
record date occurs during
a period of negative
abnormal
performance,
performance
on that day still seems unusual.
At the same time, however,
contests where the record date precedes contest announcement
do not appear
to have strongly significant negative excess returns at the day after the record
431
P. Dodd and J.B. Warner. Plo.~y contest.x
date. For those 47 contests, the mean residual at day + 1 relative to record
date is -0.0003, with a Z-statistic of -0.49.47
From table 7 it also appears that all the sample contests have indications
of negative abnormal
performance
following the day after the record date.
For those contests where the record date precedes contest announcement,
the
mean
cumulative
residual
between
contest
announcement
and election
outcome announcement
is -0.028,
with a Z-statistic
of - 1.42; while these
figures are somewhat
higher than the corresponding
values for contests
where record date follows contest
announcement,
the median
values of
- 0.051 and -0.053
are quite similar for each subsample.
In addition,
for
firms where record date follows contest announcement,
the mean cumulative
residual for day +2 relative to record date is -0.010, with a Z-statistic
of
-2.62. For days 6 through 10 relative to record date, the mean cumulative
residual is -0.017, with a Z-statistic of - 1.73.
The implications
of these findings are mixed. The results indicate that the
value of the vote explanation
has merit, and that changes in the value of the
vote were responsible
for at least a portion of the negative excess returns
between
contest
announcement
and election
outcome
announcement.
In
particular,
negative
excess returns
at the day after the record date are
explicitly predicted under the value of the vote hypothesis. However, for all
contests there are negative excess returns following the day after the record
date. While consistent
with the value of the vote hypothesis,
those returns
could also come about if the sample securities were simply mispriced in the
marketplace.
In that sense, a portion of the negative excess returns between
contest and election outcome announcements
is yet unexplained.48
6.3. The pattern of excess returns in calendar time
To
investigate
whether
the
negative
excess
returns
between
contest
*‘That a fall in share prices at the day after the record date would be detected only for
contests where the record date follows contest announcement
is perhaps not surprising.
For
contests where the record date precedes contest announcement,
at the record date a dissident
campaign was not anticipated
by the market with probability
1; one piece of evidence to support
this view is that our earlier finding of positive abnormal
performance
in the 10 days preceding
actual contest announcement
applies regardless of whether the record date precedes or follows
contest announcement.
If at the record date, a contest was not viewed as highly likely, then any
decline at the record date in the perceived probability
of share purchase at a premium would
tend to be small. Thus, the prediction of a share price fall at the day after the record date would
appear to apply less strongly to firms where record date precedes contest announcement
than to
those where record date follows contest announcement.
480ne alternative
test of the value of the vote hypothesis
was also carried out, but did not
radically alter this mixed picture. All other things equal, those firms with the largest pre-contestannouncement
abnormal
price increases due to increases in the value of the vote should also
have the largest abnormal
price falls between contest announcement
and election outcome
announcement
due to decreases in the value of the vote. However, several tests for association
between the pre-announcement
increase and the post-announcement
decrease in share prices
generally failed to reject the null hypothesis of no association.
P. Dodd and J.B. Warner, Proxy contests
432
announcement
and election outcome announcement
persisted throughout
the
1962-1978 sample period, or were present only at certain times within that
period. Table 8 reports excess returns between these dates for two different
subsamples.
The first subsample
consists of those contests where contest
announcement
appeared
prior to 1968; the second subsample
consists of
those contests taking place during or following 1968. The year 1968 is chosen
simply because it is the year that results in the two subsamples
having
approximately
equal size; similar results are obtained if instead the year 1967
or 1969 is used to partition the sample.
Table 8
Excess returns
announcement,
from day after proxy contest announcement
through
day of election outcome
by calendar time period in which the proxy contest took place (full sample size:
96 contests, time period: 1962-1978).
Period
Pre-1968
Number
of contests
Mean cumulative
with available
40
data
residual
- 0.084
Z-statistic
Median
cumulative
residual
Number
of positive
cumulative
Number
seats
of contests
in which dissidents
Mean number
residuals
Post-1967
49
- 0.009
-3.79
-0.11
- 0.062
-0.036
8
20
25
29
56
51
won
of days
Mean cumulative residual, day - 59 relative to
contest announcement
through day of election
outcome announcement
0.073
0.089
Z-statistic
1.75
2.16
Mean cumulative residual, two-day period
following record date, for contests where the
record date follows contest announcement
-0.031
-0.021
Z-statistic
- 3.65
- 2.09
For the pre-1968 subsample, the mean cumulative
residual between contest
announcement
and election outcome announcement
is -0.084,
with a Zstatistic of -3.79.
For the post-1967 subsample,
the corresponding
mean
cumulative
residual is -0.009,
with a Z-statistic
of -0.11.
These results
indicate that the negative excess returns were concentrated
in the earlier part
of the sample period; after about 1967, the negative share price behavior
during the post-announcement
period largely disappears.
Thus, no strong
indications
of a potentially
profitable trading rule involving short-selling
at
P. Dodd und J.B. Warner, Proxy contests
433
contest announcement
appear to be present in the last 10 years of the sample
period.
However, while the evidence of negative abndrmal
performance
is weak in
the post-1967
period, the phenomenon
does not disappear
entirely.
In
particular, our earlier finding that firms where the record date follows contest
announcement
have negative abnormal
performance
immediately
following
the record date continues to be present. For the two-day period following the
record
date,
those
contests
where
the record
date
follows
contest
announcement
(and which occur after 1967) have a mean cumulative
residual
of -0.021, with a Z-statistic of - 2.09; thus, the earlier indications
that there
are unusual changes in share prices around the record date are not specific
to the first part of the sample period. In addition, as table 8 indicates, the
general picture of positive share price performance
associated
with proxy
contests also applies throughout
the sample period. For the contests taking
place prior to 1968, the mean cumulative
residual from day -59 relative to
contest announcement
through the day of election outcome announcement
is
0.073, with a Z-statistic
of 1.75; for those contests occurring after 1967, the
corresponding
mean cumulative
residual is 0.089, with a Z-statistic of 2.16.
6.3.1. Interpreting
the calendar-time
pattern of the negative excess returns
The finding that the fall in share prices between contest announcement
and
election outcome announcement
largely disappeared
in the second part of the
1962-1978 sample period is consistent with at least two propositions.
The first proposition
is that while there had been mispricing
in the
marketplace,
it was eventually
corrected. One problem with this explanation
is that there were proxy contests long before the start of the sample period in
1962. It is not obvious why it took many decades for the market to ‘learn’
about the implications
of proxy contests; alternatively,
if the inefficiency was
limited only to the 1962-1967 period, it is not clear why, or what systematic
characteristics
of the contests occurring
in that period would lead to the
indications
of a possible inefXciency. For example, table 8 indicates
little
difference in the dissidents’
frequency
of winning
seats between the two
subperiods.
The second proposition
is that no mispricing existed in the first part of the
sample period or at any time. Rather than being due to mispricing,
the
differential
behavior of post-announcement
returns for the two subsamples
could have resulted because the post-contest-announcement
decline in share
prices due to changes in the value of the vote was greater for firms having
contests in the first part of the sample period than for those having contests
in the second. In that case, for the pre-1968 subsample a larger fall in share
price between contest announcement
and election outcome announcement
would not be entirely surprising.
434
P. Dodd and J.B. Warner, Proxy contests
However, the data do not strongly
support
the view that share price
changes due to changes in the value of the vote differed between
the
subsamples.
The drop in share prices immediately
after the record date is
similar
for the two subsamples;
in addition,
while the 60-day mean
cumulative
residual for the period prior to contest announcement
is slightly
higher for the pre-1968 than the post-1967 subsamples
(the figures are 0.146
and 0.104, respectively), as would be expected if the initial rise in share prices
due to increases in the value of the vote were higher, the difference is not
statistically
significant.
To sum up, at this point we do not fully understand
the differential pre1968 and post-1967
behavior
of returns
and we cannot
say with much
confidence whether the differential behavior is the indication
of the demise of
an inefficiency
or of changes
in the observed
value of the vote. Both
explanations
have serious problems. Even if the second proposition
about the
value of the vote is the correct one, but our tests not powerful enough to
pick it up, our discussion raises a deeper set of issues. We have not indicated
the factors that would have caused the value of the vote to differ across
contests; merely saying that the value of the vote depends on factors such as
the number of shares expected to be purchased begs the question of how the
contesting factions choose a proxy contest strategy, as well as the question of
what firms will be the targets of proxy contests in the first place. Future
work to examine these issues is necessary before we can have a complete
understanding
of the underlying
factors that generated the data.
7. Summary
and conclusions
This paper examines
proxy contests for seats on the firm’s board of
directors. Over a sixteen-year
sample period beginning in 1962, there were 96
such contests among listed firms. These dissident challenges were often led by
former insiders, suggesting
that proxy contests can be one outgrowth
of
competition
in the managerial
labor market. Dissidents
obtained a majority
of board seats in about one-fifth of the 96 contests. Our major conclusions
about the proxy contests are summarized
below.
7.1. Positive share price performance
associated
with proxy contests
There is positive
and statistically
significant
share price performance
around the time of the contests. For example, in the 40-day period prior to
and including
the .day of initial public contest announcement,
the estimated
magnitude
of the average abnormal
performance
is 0.105, with a Z-statistic
of 5.40. For many firms, virtually all of the positive abnormal
performance
occurs in about the lo- to 20-day period prior to (as well as including) the
time of contest announcement.
The concentration
of the pre-announcement
P. Dodd and J.B. Warner, Proxy contests
435
abnormal
performance
in the few weeks just
before
actual
contest
announcement,
coupled with the evidence we presented that proxy contest
announcements
are late relative to the start of dissident activity, indicates
that there is a contemporaneous
association
between the positive abnormal
performance
and the proxy contest itself. Moreover,
the notion that other
events such as merger activity or favorable earnings announcements
could be
responsible
for a portion
of the positive
abnormal
performance
is
unsupported
by the data.
7.2. Proxy
contests, economic
efficiency,
and board control
The finding
of positive
abnormal
performance
is consistent
with the
benefit
shareholders
by transferring
proposition
that
proxy
contests
corporate
resources to more highly valued uses. That proposition
is part of
the standard economic analysis of proxy contests such as that found in some
textbooks. The finding of positive abnormal
performance
is inconsistent
with
several scenarios
in which the cash flows accruing
to (non-management)
shareholders
are not enhanced by a contest, and in which the contests have
either no impact or a negative impact on share prices. The evidence fails to
support Berle’s (1962, p. 438) contention
that the standard analysis of proxy
contests,
which emphasizes
the efficiency
implications
of the contests,
describes ‘a wholly imaginary picture’.
Moreover,
the positive share price performance
holds for contests where
the dissidents fail to capture majority control of the board as well as those
where the incumbents
are ousted. In both cases the results apply to the vast
majority of the contests and the results are not driven by a few spectacular
cases. Although the dissidents are seldom successful in transferring
control of
the board, they gain some board representation,
via mechanisms
such as
cumulative
voting, in over half of the sample contests. In this sense, success
of a dissident
campaign
does not require a complete
transfer of board
control.
Positive
share price performance
is also found
for contests
where
incumbents
win all seats. Apparently,
the fact of a challenge to management
is associated with expectations
of improved corporate performance.
However,
the contest outcome itself does appear to ‘matter’, and there is evidence of a
small share price reaction at the time of outcome announcement:
positive in
those cases where dissidents win seats and negative where they fail to win
seats. Such evidence is consistent with the view that dissident representation
was expected
to enhance
the cash flows accruing
to non-management
shareholders.
7.3. The market value of the vote
There is evidence
that a portion
of the positive
share price changes
taking
P. Dodd and J.B. Warner, Proxy
436
contests
place in the early stages of the sample proxy contests was not permanent;
the
evidence is particularly
strong for those contests occurring in the first part of
the 1962-1978 sample period. The finding that some of the positive share
price changes
associated
with a proxy contest
are only temporary
is
predicted by Manne (1962) who argues that the market value of the vote
attached
to corporate
shares rises temporarily
during a proxy contest. In
addition,
we detected small but significant
abnormal
share price falls just
after the record date, which is an important
date in determining
who has the
right to vote shares. Such evidence lends additional
support to the view that
the negative excess returns detected for the later stages of the sample proxy
contests were at least partially attributable
to declines in the market value of
the vote.
Appendix
This appendix
gives details of the
examine
the statistical
significance
residual between any two dates, we
Pate11 (1976, p. 256) and Dodd (1980,
statistical tests used in the paper. To
of the mean standardized
cumulative
employ a procedure
similar to that of
p. 1 11-121):49
(1) For each security j, the prediction
error PE,, for each of the (d,j
- dij+ 1) days
in the period
under
study
(t = d,,, dij+ 1,. . ., dzj) is
standardized
by the square root of its estimated forecast variance, to form a
standardized
prediction error, SPE,,,
SPEj, = PEj,lSjt,
where
+
Sjt =
Lj 5 300.
’
r=l
4’Assumptions
required for the significance tests are discussed further in both references.
The advantage
of the standardization
procedure
is that it permits the entire cross-sectional
distribution
of cumulative
residuals to simply be compared
to a unit normal, as in panel A of
table 4. However, with the standardization
procedure,
it is possible in principle that the mean
cumulative
residual and the mean standardized
cumulative
residual will be of different sign; this
might happen, for example, if most cumulative
residuals are positive but there are a few extreme
negative outliers having unusually
large standard
deviations.
In such a situation,
the mean
cumulative
residual and the Z-statistic,
calculated
for the mean standardized
residual, can also
differ in sign, although such instances rarely occur in the paper’s tables.
It should also be noted that implicit in any standardization
procedure
is some notion of the
optimal way in which to weight the observations.
For example, in the calculation
of the test
statistic Z, the standardization
implicitly tends to give less weight to cumulative
residuals for
firms with many days between d, and d, (and for which the variance of the cumulative residual
will thus be large); such a weighting
scheme could be inappropriate
if the magnitude
of
abnormal
performance
between the dates is positively related to the length of time between the
dates. Although not reported in the paper, we were generally unable to find such evidence of
systematic association
between the length of various time intervals (e.g., contest announcement
to shareholders’
meeting) and the level of (estimated) abnormal performance.
p. Dodd and J.B.
Warner, Proxy c‘onfrst.s
431
Here s: is the estimated residual variance from the market model regression
for security j, R,,, is the average market return over the Lj days used for the
regression, and R,, is the return to the market index at day t.
(2) For each security j, the standardized
prediction
errors for each of the
(dzj-dlj+
1) days of the prediction interval under study are summed to form
a standardized
cumulative
prediction error Wj,
If the prediction
errors PE,, are normal and independent
across t, then the
standardized
cumulative
prediction
error Wj is distributed
Student-r
with
(Li-2) degrees of freedom; since Li is large, Wj is assumed to be distributed
unit normal.”
(3) To test the significance
of the average
standardized
prediction error in a sample of N securities, we then compute
cumulative
where
Assuming
that
the standardized
cumulative
prediction
errors
are
independent
across securities, then if the expected value of the standardized
prediction
error is equal to 0, the test statistic Z will be distributed
unit
normal for the assumed unit normal Wj’s.
“The
mean and median
values of L, are 270 and 300, respectively.
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