Corporate governance through the proxy contest: Evidence and implications

The limited body of empirical research concerning the proxy contest provides little evidence that shareholders have suffered material equity losses. In addition, the inferences derived by prior researchers examine narrow time periods and provide analysis devoid of a long-term perspective of this important corporate control mechanism.In this dissertation, a sample of 97 election contests during the period 1968 to 1987 is formed. Using an equity return methodology advocated by Dimson and Marsh (1986), we find cumulative abnormal returns for all contests to be -34% beginning 60 months and ending 4 months prior to the announcement of the contest. This evidence, supportive of the Manne hypothesis, is attributed to estimation problems using conventional market model methodology.The operating performance of election contest targets is also examined using an intuitively insightful buy-and-hold investment assumption. The inferior performance of contest targets relative to a control sample, formed using firms of similar industry and asset size, is striking and verifies the conclusions derived from equity returns.Conventional financial performance ratios show that contest targets have chronic profitability problems which extend at least five years prior to the announcement of the contest. Performance ratios addressing liquidity, leverage, and asset utilization do not suggest abnormal performance with the exception of firms where dissidents acquire control of the firm.Shareholders appear to incorporate firm performance in casting their proxies. Firms in which management retained all board seats exhibit profitability levels generally preferable to those firms where dissidents acquire control of the board.Economic theory would suggest that firms engaged in this corporate control mechanism show relative improvement following the contest. In cases where incumbent directors are reelected to all board seats, we find support for a "kick-in-the-pants" hypothesis. However, firms in which dissidents acquire seats, particularly majority control of the board, show continued deterioration in operating performance. The two-year period following contest announcement shows persistent decline in cumulative abnormal returns of 30 percent. A strong association exists between the prior quality of the firm and contest outcome. The fact that the market does not forecast this performance suggests an information inefficiency which remains enigmatic.U of I OnlyETDs are only available to UIUC Users without author permissio