Diane Del Guercio

The Motivation and Impact of Pension Fund Activism

Pension funds have become increasingly active in the governance of companies in which they own stock. A common form of activism includes the submission of shareholder proposals to the corporate proxy statement. This study examines the impact and motivation of pension fund activism by studying the targets of the largest, most active funds from 1987 through 1993. Previous studies show that shareholder proposals are associated with negligible shareholder wealth effects, which some attribute to personal publicity or political motivations associated with public funds. We argue that a proper assessment of fund motivation and impact requires recognition of the heterogeneity across pension funds in investment strategies, and activism objectives and tactics. In addition, due to event date uncertainty common to shareholder proposals, a more powerful method of measuring impact is useful; we measure the effectiveness of the funds in generating significant changes in target company policies. Relative to a performance, size and industry matched control sample, we find that companies receiving pension fund proposals subsequently experience a higher frequency of governance events such as shareholder lawsuits, and responsive corporate policies such as asset sales, restructurings, and layoffs. We also show that variation in impact across target firms is related to fund heterogeneity. We conclude that the funds are more successful at monitoring target firms than previously recognized, and find no evidence to support motivations other than fund value maximization.

The Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds vs. Pension Funds

This study compares the relations between asset flow and performance in the retail mutual fund and fiduciary pension fund segments of the money management industry, and relate empirical differences to fundamental differences in the clientele they serve. A striking difference is the shape of the flow-performance relation. In contrast to mutual fund investors, pension clients punish poorly performing managers by withdrawing assets under management and do not flock disproportionately to recent winners. We interpret these and other empirical differences in the context of the manager evaluation procedures typical in each segment. We conclude that pension managers have little incentive to engage in the risk-shifting behavior previously identified among mutual fund managers.

Star Power: The Effect of Monrningstar Ratings on Mutual Fund Flow

We apply an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has subsantial independent influence on the investment allocation decisions of retail mutual fund investors. It is the discrete change in the star rating itself and not the change in the underlying performance measures that drives frow. We document econnomically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow performance literature, we find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.

Can Strong Corporate Governance Selectively Mitigate the Negative Influence of 'Special Interest' Shareholder Activists? Evidence from the Labor Market for Directors

The motivation behind labor union and public pension fund activism is widely debated. We posit that activism motivated by private benefits primarily arises when there is a firm-specific conflict of interest, such as when a union activist also represents workers in collective bargaining negotiations. We provide evidence that the labor market for directorships mitigates the negative effect of “special interest” activism on other shareholders. Specifically, directors who cater to self-serving requests are punished with a loss in directorships and damage to their reputation as corporate monitors. Moreover, we provide insight into when boards are most vulnerable to “special interest” pressure.

The Deterrence Effect of SEC Enforcement Intensity on Illegal Insider Trading: Evidence from Run-up before News Events

We examine whether enforcement of insider trading laws deters illegal trading. Examining insider trading cases filed by the SEC over the last decade, we find that the price impact on insider trading days is much smaller than the effect documented by Meulbroek (1992) for the 1980s, consistent with increased fear of prosecution. Moreover, we find that pre-announcement run-up in samples of all takeover bids and earnings announcements is negatively related to resource-based enforcement measures, providing evidence that aggressive enforcement deters illegal activity.

The Deterrent Effect of the Securities and Exchange Commission's Enforcement Intensity on Illegal Insider Trading: Evidence from Run-up before News Events

We examine whether public enforcement of US insider-trading laws affects price discovery. Examining insider-trading civil cases filed by the Securities and Exchange Commission (SEC) from 2003 to 2011, we find that the price impact on insider-trading days is much smaller than the effect documented for the 1980s, consistent with increased fear of prosecution. Moreover, we find that preannouncement anticipatory run-up in comprehensive samples of takeover bids and earnings announcements is negatively related to resource-based measures of public enforcement intensity, which suggests that aggressive SEC enforcement deters illegal activity. In addition, we find that quoted bid-ask spreads are negatively related to the SEC’s enforcement intensity, which suggests that greater enforcement improves liquidity. Moreover, the negative and significant relation between run-up and the SEC’s enforcement intensity persists after controlling for quoted spreads.