Laura T. Starks

Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors

We study shareholder proposals across a period of substantial activity and find systematic differences both across sponsor identity and across time. To understand how these proposals are perceived by other investors, we examine voting outcomes and short-term market reactions conditioned on proposal type and sponsor identity. The voting analysis documents that sponsor identity, issue type, prior performance and time period are important influences on the voting outcome. Moreover, it appears that proposals by institutional and coordinated activists act as substitutes. The nature of the stock market reaction, while typically small, varies according to the issue and the sponsor identity.

Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective

We report evidence on chief executive officer (CEO) turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance.

Voting with their feet: institutional ownership changes around forced CEO turnover

Abstract We investigate whether institutional investors “vote with their feet” when dissatisfied with a firms management by examining changes in equity ownership around forced CEO turnover. We find that aggregate institutional ownership and the number of institutional investors decline in the year prior to forced CEO turnover. However, selling by institutions is far from universal. Overall, there is an increase in shareholdings of individual investors and a decrease in holdings of institutional investors who are more concerned with holding prudent securities, are better informed, or are engaged in momentum trading. Measures of institutional ownership changes are negatively related to the likelihoods of forced CEO turnover and that an executive from outside the firm is appointed CEO.

The Evolution of Shareholder Activism in the United States

In the early 1900s American financial institutions were active participants in U.S. corporate governance but the enactment of securities laws in the 1930s limited the power of financial intermediaries and thus their governance role. The consequence of such laws and regulations was a progressive widening of the gap between ownership and control in large U.S. public companies. In 1942, SEC rule changes allowed shareholders to submit proposals for inclusion on corporate ballots. Since that time, shareholder activists have used the proxy process, and other approaches, to pressure corporate boards and managers for change. In particular, during the mid-1980s, the involvement of large institutional shareholders increased dramatically with the advent of public pension fund activism. At the heart of shareholder activism is the quest for value, yet the empirical evidence suggests that effects of such activism are mixed. We review the evidence on activism and, while some studies have found positive short-term market reactions to announcements of certain kinds of activism, there is little evidence of improvement in the long-term operating or stock-market performance of the targeted companies. A recent increase in hedge fund activism appears to be associated with dramatic corporate change, however, the research in this area is still somewhat nascent and the long-term effects are still unknown.

Return autocorrelation and institutional investors

Abstract We propose and test the hypothesis that trading by institutional investors contributes to serial correlation in daily returns. Our results demonstrate that NYSE particles and individual security daily return autocorrelationsare an increasing function of the level of institutional ownership. Moreover, the results are consistent with the hypothesis that institutional trading reflects information and increases the speed of price adjustment. The relation between autocorrelation and institutional holdings does not, however, apparent to be driven by market frictions or rational time-varying required rates of return. We conclude that institutional investors correlated trading patterns contribute to axial correlation in daily returns.

Stock versus Mutual Ownership Structures: The Risk Implications

This article provides empirical tests of the risk differences between two types of ownership structure in the property-liability insurance industry. Empirical evidence is provided that suggests stock insurers have more risk than mutuals where the risk inherent in future cash flows is proxied by the variance of the loss ratio. Further evidence suggests that stock insurers write relatively more business than do mutuals in lines and states having higher risk. Copyright 1993 by University of Chicago Press.

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories we document widespread behind-the-scenes intervention as well as governance-motivated exit. Both governance mechanisms are viewed as complementary devices, in which intervention typically will occur prior to a potential exit. We find that long-term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, most investors use proxy advisors and believe that their information improves their own voting decisions.

Day-of-the-week and intraday effects in stock returns☆

Abstract This study examines day-of-the-week effects using hourly values of the Dow Jones Industrial Average. We find that over the 1963–1983 period the weekend effect has sifted from characterizing active trading on Monday to characterizing the non-trading weekend. Over the early part of our sample period negative returns characterize each hour of trading on Monday, while the return from Friday close to Monday open is positive. In the most recent subperiod, Monday average hourly returns after noon are all positive and the weekend effect is due to negative average returns from Friday close to Monday open.

Changes in Institutional Ownership and Stock Returns: Assessment and Methodology

Although the relation between quarterly changes in institutional investor ownership and contemporaneous stock returns is well documented, the source of the relation remains unclear because institutional ownership data are unavailable at higher frequencies. In this study, we develop a method to generate estimates of higher frequency covariances when one variable is observed at lower frequencies (e.g., quarterly changes in institutional ownership and monthly stock returns). Our method provides evidence that institutional trading has both temporary and permanent price effects and that the latter is associated with information effects.

Short-Sale restrictions and Market Reaction to Short-Interest Announcements

According to the Diamond-Verrecchia hypothesis, if increases in short interest are correlated with information that is not yet public, they should precipitate a price adjustment. Stocks with unexpected increases in short interest are found to generate statistically significant, but small, negative abnormal returns for a short period around the announcement date. When the sample is divided into stocks with and without tradable options, nonoptioned stocks closely mimic these results but the optioned stocks do not. In a cross-sectional analysis of individual firms, the short-term negative abnormal returns are found to be 1) more negative, the higher the degree of unexpected short interest and, 2) less negative if the firm has tradable options.