Disciplining proxy proposals

Would banks' management teams have avoided excessive risk-taking if they had been thoroughly monitored by shareholders? Is shareholder activism a good thing in general? In a recent TILEC discussion paper TILEC member Luc Renneboog and TILEC extramural fellow Peter G. Szilagyi (Judge Business School, Cambridge) provide evidence on the corporate governance role of shareholder-initiated proxy proposals. Previous studies debate over whether activists use proposals about corporate decisions to discipline firms or to simply advance their self-serving agendas, and whether such proposals are effective at all in addressing governance concerns. Using the largest sample yet examined as well as extensive controls for governance quality, the authors find that activists use the proxy process as a disciplinary mechanism, and as such are valuable monitoring agents. Moreover, proposal announcements in the proxy statements have positive stock price effects, and both the market and the voting shareholders respond as much to the target firm´s governance quality as to the proposal´s objective and sponsoring shareholder. The authors conclude that shareholder proposals have nontrivial control benefits, countering arguments that they should be restricted by regulatory authorities.