Shareholder activism: the effect of shareholder proposals ...

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Shareholder activism: the effect of shareholder proposals on target firms Master Thesis Duco Rosier S2522225 [email protected] Supervisor: Prof. Dr. C.L.M. Hermes Co-assessor: Dr. C. Laureti MSc International Financial Management Rijksuniversiteit Groningen, Faculty of Economics and Business Date of submission: 08-01-2020 Word count: 18.086

Transcript of Shareholder activism: the effect of shareholder proposals ...

Page 1: Shareholder activism: the effect of shareholder proposals ...

Shareholder activism: the effect of shareholder

proposals on target firms

Master Thesis

Duco Rosier – S2522225

[email protected]

Supervisor: Prof. Dr. C.L.M. Hermes

Co-assessor: Dr. C. Laureti

MSc International Financial Management

Rijksuniversiteit Groningen, Faculty of Economics and Business

Date of submission: 08-01-2020

Word count: 18.086

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Abstract

The relationship between shareholder activism and firm performance is a much debated and

researched subject in the field of corporate governance. However, to date, the empirical

results remain inconclusive and show positive, negative, and even insignificant relationships,

which may be explained by the heterogeneity of activists’ demands as well as the divergent

streams of theories used throughout literature. The key objective of this thesis is to contribute

to this debate by using a multifaceted measure of shareholder activism in combination with a

two-way distinction of firm performance. This is done by exploring the effects of filed

executive compensation-related and corporate governance-related shareholder proposals on

firm financial performance and by exploring the effects of filed social/environmental-related

shareholder proposals on firm social performance of the 250 largest U.S. listed firms. Based

on agency, institutional, managerial entrenchment, and business relationship theory, it is

argued that the filing of shareholder proposals will lead to an increased financial and social

performance at target firms. Additionally, a moderating role for foreign institutional

ownership is assessed in this context. By conducting several multiple regression analyses it is

found that all three categories of shareholder proposals have no or even negative effects on

their respective performance dimension, which is contrary to this thesis’ predictions. Also,

against expectations, foreign institutional ownership does not moderate the relationship

between the three categories of shareholder proposals and firm performance. The findings of

this thesis thereby add to the shareholder activism-performance literature and have several

theoretical and managerial implications.

Keywords: firm performance, corporate governance, shareholder activism, shareholder

proposals, foreign institutional ownership

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Table of content

Abstract ..............................................................................................................................................2

List of Tables ......................................................................................................................................5

List of Figures ....................................................................................................................................5

List of Abbreviations ..........................................................................................................................5

1. Introduction ................................................................................................................................6

2. Literature review .........................................................................................................................9

2.1 Theoretical foundations ........................................................................................................... 11

2.1.1 Agency theory and shareholder activism ........................................................................... 11

2.1.2 Institutional theory and shareholder activism.................................................................... 13

2.2 Antecedents of shareholder activism ........................................................................................ 14

2.2.1 Target firm antecedents .................................................................................................... 14

2.2.2 Activist antecedents .......................................................................................................... 16

2.2.3 Environmental antecedents ............................................................................................... 17

2.3 Process and outcomes of shareholder activism ........................................................................ 18

2.4 Hypotheses .............................................................................................................................. 20

2.4.1. Shareholder activism and firm financial performance ...................................................... 21

2.4.2. Shareholder activism and firm social performance ........................................................... 23

2.4.3. The moderating effect of foreign institutional ownership on the shareholder activism -firm

performance relationship .......................................................................................................... 24

2.5 Conceptual model.................................................................................................................... 26

3. Research methodology .............................................................................................................. 27

3.1 Data collection ........................................................................................................................ 27

3.2 Sample .................................................................................................................................... 28

3.3 Measurement of variables........................................................................................................ 29

3.3.1. Independent variables ...................................................................................................... 29

3.3.2. Dependent variables ........................................................................................................ 30

3.3.3. Moderating variable ........................................................................................................ 32

3.3.4. Control variables ............................................................................................................. 33

3.4 Empirical data analysis ........................................................................................................... 34

3.5 Robustness tests ...................................................................................................................... 34

4. Results ...................................................................................................................................... 36

4.1 Test of basic assumptions ........................................................................................................ 36

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4.2 Descriptive statistics ............................................................................................................... 37

4.3 Correlations ............................................................................................................................ 38

4.4 Regression results ................................................................................................................... 40

4.5 Robustness tests results ........................................................................................................... 43

4.6. Regression results with a refined shareholder activism measure ............................................. 45

5. Discussion................................................................................................................................. 48

6. Conclusion ................................................................................................................................ 53

6.1 Theoretical implications .......................................................................................................... 53

6.2 Practical implications ............................................................................................................. 54

6.3 Limitations and future research ............................................................................................... 55

Acknowledgments ............................................................................................................................ 57

References ........................................................................................................................................ 57

Appendices ....................................................................................................................................... 65

Appendix A: Glossary of shareholder proposals ............................................................................ 65

Appendix B: Industry types ........................................................................................................... 67

Appendix C: Preliminary analysis ................................................................................................. 68

Appendix D: Shareholder proposal and industry type frequencies .................................................. 71

Appendix E: Descriptive statistics ................................................................................................. 73

Appendix F: Correlation matrix 2014 ............................................................................................ 75

Appendix G: Regression results robustness test 1 (2014 dataset).................................................... 76

Appendix H: Regression results robustness test 2 (different ROA period 2015) ............................. 78

Appendix I: Regression results robustness test 3 (different ROA period 2014) ............................... 79

Appendix J: Regression results robustness test 4 (ROS 2015) ........................................................ 80

Appendix K: Regression results robustness test 5 (ROS 2014) ....................................................... 81

Appendix L: Regression results robustness test 6 (differentiation of proposal submitters 2015) ...... 82

Appendix M: Regression results robustness test 7 (differentiation of proposal submitters 2014) ..... 84

Appendix N: Regression results using a refined measure of shareholder activism (2015 shareholder

vote %) ......................................................................................................................................... 86

Appendix O: Regression results using a refined measure of shareholder activism (2014 shareholder

vote %) ......................................................................................................................................... 88

Appendix P: Regression results using a refined measure of shareholder activism (ROS shareholder

vote %) ......................................................................................................................................... 90

Appendix Q: Regression results using a refined measure of shareholder activism (ROS shareholder

vote %) ......................................................................................................................................... 91

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List of Tables

Table 1: Descriptive statistics

Table 2: Correlation matrix

Table 3: Regression analysis financial performance

Table 4: Regression analysis social performance

List of Figures

Figure 1: Conceptual model

List of Abbreviations

CSP Corporate social performance

FIO Foreign institutional ownership

ROA Return on assets

ROS Return on sales

SD Standard deviation

SoF Say-on-Frequency

SoP Say-on-Pay

VIF Variance inflation factor

VOC Vereenigde Oostindische Compagnie

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1. Introduction

Dating all the way back to 1622, in the time where the world’s first-ever formally publicly

traded company, the ‘Vereenigde Oostindische Compagnie’ (Dutch East India Company, or

VOC), was being active, the concept of shareholder activism originates. At that time, the

VOC dominated trade with the East Indies and its shares were being traded on the Amsterdam

stock exchange. Although the shareholders of the VOC could easily sell their shares, they did

not have any control rights at all as the VOC never held any shareholders’ meetings

(Gelderblom & Jonker, 2004). The absence of control rights, however, did not hinder the

VOC shareholders to articulate their concerns. Unsatisfied shareholders argued that the

directors managed the company inefficiently and that they used their powers primarily for

self-enrichment. In order to stop this, the complainants demanded more influence in the VOC

(de Jongh, 2011).

Ever since this first form of shareholder activism in the 17th

century, the landscape

underlying it, also called corporate governance, has been evolving. In this landscape, the

balance of power and decision-making between board-directors, executives and shareholders

is subject to many debates. The abovementioned VOC shareholders’ activism action thereby

illustrates the disputes that can arise when ownership and control are separated. These

disputes can take various forms and as such shareholder activism has been targeting corporate

governance and firm financial performance, but also social, political, and environmental

issues (Clark & Crawford, 2012; David, Bloom, & Hillman, 2007; Dimitrov & Jain, 2011).

Especially with the increase in institutional shareholdings in the mid-1980s shareholder

activism really began to rise, as many institutions started to engage in activist efforts to urge

firms into better performance (Denes, Karpoff, & McWilliams, 2017). The relationship

between shareholder activism and firm financial and social performance has since then

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sparked much research interest in corporate governance literature, but empirical evidence on

the exact nature of this relationship remains inconclusive. Some studies have reported that

shareholder activism improves performance (Clark & Crawford, 2012; Cunat, Gine, &

Guadalupe, 2012), while others have found that it leads to negative performance (Johnson &

Greening, 1999; Cai & Walkling, 2011), or not any significant reaction at all (Waddock,

2003; Becht et al., 2009). These mixed results may be explained by the heterogeneity of

activists’ demands, as well as the divergent streams of theories used throughout literature

(Karpoff, 2001). Although scholars have long been aware of these differences, they have had

little consideration for their implications in the methodology of their studies, resulting in the

different performance explanations (Goranova & Ryan, 2014). Individually these studies thus

offer different performance explanations, however, collectively they suggest that shareholder

activism is a complex phenomenon where a distinction should be made between different

types of activism demands. It can, therefore, be argued that this heterogeneity of shareholder

activism should be seen as a multidimensional construct, one in which shareholders voice

their concerns through the filing of varying types of proposals. The study of Karpoff,

Malatesta, & Walkling (1996) makes such a distinction by introducing different types of

shareholder proposals: executive compensation-related proposals, corporate governance-

related proposals, and social/environmental-related proposals.

Even though shareholders can thus voice their concerns via proposals and thereby

potentially influence firm performance, their own antecedents are also important to consider

when explaining the abovementioned relationship. Earlier research, for example, finds that

whether shareholders choose to engage in activism or not is largely determined by their own

characteristics (Ryan & Schneider, 2002; Sikavica & Hillman, 2008). In this sense, an

important characteristic of activists is their salience and negotiating leverage relative to

corporate management as these characteristics allow shareholders to pressurize and monitor

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management more extensively (Kang & Shivdasani, 1995). Only large(r) shareholders possess

these characteristics, especially institutional investors (e.g., banks, pension funds), as they

own large blocks of stock within a firm (Chaganti & Damanpour, 1991). Compared to

domestic institutional investors, foreign institutional investors have the relevant monitoring

characteristics even to a stronger degree, as they are less likely to have business relations with

the local firm (Desender et al., 2016). It can, therefore, be argued that the impact of

shareholder activism on firm performance depends on activist characteristics, where foreign

institutional ownership (FIO) has an especially important role within activism as it enables

activists to realize the inherent performance effects of activism. However, only little research

attention has been given on the possible interaction effects of FIO on the relationship between

shareholder activism and firm performance.

Hence, in order to shine a better light on the mixed results for the relationship between

shareholder activism and firm financial and social performance, this thesis uses a

multidimensional construct of shareholder activism by taking into account three different

types of shareholder proposals as introduced by Karpoff et al. (1996). Additionally, a

moderating role for foreign institutional ownership will be examined with regard to the

shareholder activism-performance relationship, since this has only received little research

attention. This thesis thereby aims to bridge these research gaps by using the following main

research question:

What is the effect of shareholder activism on the financial and social performance of firms

and how is this relationship moderated by foreign institutional ownership of firms?

By examining the unclear shareholder activism-firm performance relationship with a multi-

dimensional construct of shareholder activism combined with the studying of a moderator,

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this thesis contributes to existing shareholder activism literature. Also, important practical

contributions are made by this thesis. As financial performance, and increasingly so social

performance, can be seen as the main goal of firms, new knowledge about how performance

can be improved or influenced is highly useful for both shareholders and managers. This

thesis contributes to this knowledge by showing how activism affects both financial and social

performance.

In order to test the main research question, this paper will use multiple regression

analysis on a sample of firms. In the first part, the existing literature on shareholder activism

and firm financial and social performance is reviewed, as well as research on the influence of

FIO. Based on these key underlying concepts, the hypotheses and the core conceptual

constructs of this research will be elaborated on. In the second part, the research design and

methodology will be explained, including a description of the data. Subsequently, the data is

analyzed in-depth and discussed. Last, the limitations and contributions of the study, as well

as directions for future research, will be examined.

2. Literature review

The concept of shareholder activism has been an evolving concept, especially over the last

few decades. Until the 1970s, the main actors on the shareholder activism stage are individual

investors, also called ‘corporate gadflies’ by the contemporary media (Gillan & Starks, 2007).

In the 1970s, however, this begins to change as activists’ agendas start to include more

socially oriented issues. This marks the beginning of the so-called ‘social activism’ field, a

stream within shareholder activism that focusses on social, environmental, and political

activism that seeks to pressurize firms to change their business practices and thereby thus

their societal impact (Rehbein, Waddock, & Graves, 2004; Sjöström, 2008). Due to this

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stream, the amount of shareholder-initiated proposals slowly starts to increase, but it is not

until the mid-1980s that they really begin to surge (Karpoff et al., 1996). It is at this time that

both the Institutional Shareholder Services and the Council of Institutional Investors is

founded, thereby marking a turning point for institutional activism (Davis & Thompson,

1994; Lipton, 2007). These two associations offer the possibility to pool resources and use

proxy votes to protect the interests of their member investors, including many public pension

funds, and thereby pave the way for the second stream in shareholder activism: the so-called

‘financial activism’ field. This financial stream embodies shareholders' primacy and is

especially focused on governance-based financial activism, thereby attempting to improve

governance structures, maximize shareholder value and making managers more accountable

to the firm’s shareholders (Gillan & Starks, 2000, 2007).

Although the goals of financial and social activism can be seen as theoretically

conflicting - social goals may not be shared by financially driven shareholders, while

enhanced shareholder returns may be viewed by socially driven advocates as being seized at

the expense of other stakeholders (Barnett & Salomon, 2012) - the two streams of activism

often coincide in practice. Shareholders often have multiple interests and demands and they

may advocate for both financial as well as social improvements at target firms (Goranova &

Ryan, 2014). However, in order to explain what shareholder activism’s antecedents,

processes, and outcomes are, theoretical foundations remain essential to understand. These

foundations namely present a systematic way of understanding events, behaviors, and/or

situations.

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2.1 Theoretical foundations

In order to explain the antecedents of the two streams of shareholder activism, two types of

distinct underlying theoretical foundations can be identified from literature. Shareholder

activism is thereby defined as “the use of ownership position to actively influence company

policy and practice. Shareholder activism can be exerted through letter-writing, dialogue with

corporate management or the board, asking questions at open sessions in general meetings,

and through the filing of formal shareholder proposals” (Sjöström, 2008: 142). In this sense,

shareholder activists aim to strive for active dialogue or confrontation when the costs of

activism are outweighed by its benefits (Pozen, 1994). Activist identities can thereby range

from a singly minority investor, frequently called a ‘blockholder’, to institutional investors

with majority stakes.

As mentioned earlier, the emphasis of activist shareholders can be to focus on

financially poorly performing firms, called financial activism, and/or to focus on socially

poorly performing firms, called social activism. The roots of the financial activism stream can

be traced back to the rise of agency theory in explaining the battle for corporate control in the

1980s and onward (Zajac & Westphal, 1995), while the social activism stream is an

ideological successor of the 1960s civil rights movement and can be traced back to

institutional theory (Reid & Toffel, 2009).

2.1.1 Agency theory and shareholder activism

Of the two theories mentioned above, agency theory has been the most widely used one

within corporate governance literature in general and in shareholder activism literature in

particular (Goranova & Ryan, 2014). This theory reasons that due to a separation of

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ownership and control in publicly traded companies an agency problem arises between

principals (the shareholders) and agents (the managers). This agency problem occurs because

these two cooperating parties have different self-serving goals and division of labor.

Specifically, agency theory focusses on the agency relationship, a relationship in which the

principal delegates work and decision-making authority to a certain degree to the agent, who

performs this work. So, in the case of publicly traded firms, the work that is delegated by the

shareholders is the control of their ownership, the firm, to managers. The theory attempts to

describe this relationship by using the metaphor of a contract (Jensen & Meckling, 1976).

Agency theory is interested in resolving two problems that might occur in agency

relationships: (1) a goal difference between the principal and agent where it is difficult or

costly for the principal to actually verify what the agent is doing, resulting in an information-

asymmetry, and (2) the problem of risk sharing that occurs when the principal and agent have

different perspectives on risk. As the unit of analysis is the ‘contract’ governing the

relationship between the principal and the agent, the theory focusses on deciding the most

efficient contract that can regulate the principal-agent relationship (Eisenhardt, 1989). In the

case of publically traded firms, the shareholders thus need to closely monitor and incentivize

managers via structural mechanisms so that the managers will maximize shareholder value in

order to avoid the principal-agent conflict (Beatty & Zajac, 1994). Agency theorists have

presented different solutions for this alignment problem, resulting in many different options,

such as board independence, shareholder right plans, and granting executive stock options,

(Denis & McConnell, 2003).

However, shareholders may experience that these mechanisms are not working

properly for them, or are not in place at all, to such an extent that they come into action to

change this. According to the agency perspective, activists are thus seen as conveyors of

dissatisfaction with corporate governance or firm performance (Becht et al., 2009) or as

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requiring specific actions from managers to improve shareholder value (Gantchev, 2013). By

conveying their dissatisfaction, these activists aim to reduce principal-agent problems.

2.1.2 Institutional theory and shareholder activism

Next to agency theory, another important theory within shareholder activism literature is

institutional theory. Key in institutional theory is the necessity of organizational legitimacy as

this ensures organizational survival. The extent to which organizations are deemed socially

acceptable or legitimate thereby relates to societal norms and expectations (Ashforth & Gibbs,

1990). In order to achieve legitimacy, firms need to show certain behavior that adheres to

these societal norms. In their search for organizational legitimacy, firms often end up with

similar strategies as firms operating in the same environment due to three so-called

‘isomorphic processes’ (DiMaggio & Powell, 1983): (1) coercive pressure (political

influence, e.g., government regulations), (2) mimetic forces (standard responses to

uncertainty, e.g., the copying of newly developed technology), and (3) normative standards

(professionalization of an organizational field, e.g., adoption of ‘best practices’ in an

industry). Each of these three forces thereby leads to an ever more increasing homogenization

of organizational practices within a given organization field because firms that meet the

environment’s expected characteristics receive societal legitimacy and gain access to

resources (Toma, Dubrow, & Hartley, 2005). If a firm, however, decides not to follow these

isomorphic forces it could become illegitimate and would be denied access to resources that it

needs in order to survive.

In sum, there appears to be a very important theoretical assumption in institutional

theory, namely the guidance process of social actors towards social legitimacy. This

preoccupation with social legitimacy is even stronger than economic efficiency and

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shareholder wealth because organizational survival depends on it (Rowley & Moldoveanu,

2003; Scott, 2011). As firms are ingrained within wider society through their operations, by,

for example, their use of natural resources and employment of people, expectations are thus

created on firms by social actors in their surrounding environment to respect shared norms.

According to the institutional perspective, activists are thus seen as conveyers of

dissatisfaction with the social performance of the target firm and require specific actions from

managers to improve this (den Hond & de Bakker, 2007). By conveying their dissatisfaction,

these activists aim to shape and/or change societal norms about corporate social performance

(CSP), which in turn pressurizes firms via the three isomorphic forces to adhere to this.

2.2 Antecedents of shareholder activism

While the abovementioned theoretical foundations of shareholder activism can explain

activists’ financial and/or social motivation to engage in activism, it is important to take a

fine-grained approach that goes beyond this as that helps to fully understand what triggers

shareholder activism. The antecedents of shareholder activism are therefore also essential to

take into account. These antecedents consist of firm, activist, and environmental

characteristics (Ryan & Schneider, 2002).

2.2.1 Target firm antecedents

Research finds that the two kinds of shareholder activists often target firms with the same type

of characteristics. The most consistently tested causes of activism in literature thereby are

firm size and performance. According to the financial activism stream, activists normally

focus on large companies as this enables them to create more value. Large firms are more

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difficult for shareholders to monitor effectively and therefore more prone to agency problems

(Strickland, Wiles, & Zenner, 1996; Del Guercio & Hawkins, 1999). Alternatively, according

to the social activism stream, large firms are more sensitive to challenges to their social

legitimacy than smaller firms due to their greater visibility (Rehbein et al., 2004). Activist

campaigns aimed at large firms have a better chance of attracting public and media attention,

thereby facilitating spillover effects to non-targeted firms that will adopt the reforms

demanded by activists at industry leaders (Ferri, & Sandino, 2009). In terms of performance,

shareholder activists tend to target firms whose stock market performance is suboptimal (e.g.,

Brav et al., 2008; Renneboog & Szilagyi, 2011). The agency problem of free cash flows

theorizes that managers prefer to spend cash on value-decreasing investments instead of

distributing it back shareholders (Jensen, 1986). Firms’ cash holdings draw activists’

attention, especially when they have lower distributions to their shareholders (Klein & Zur,

2009). In contrast to this, social activists choose to focus on targeting firms with good prior

performance. Addressing social concerns diverts managerial time and firm resources away

from short-term shareholder value creation to the interest of long-term value creation

(Tudway & Pascal, 2006). This makes it rational for social activists to target firms that have

slack resources to address social issues (Zietsma & Winn, 2008).

Looking at corporate-governance oriented antecedents, the level of executive

ownership and executive compensation are important target firm antecedents. Executive

ownership can be seen as a substitute for the extent of alignment between managers and

shareholders (Ryan, Buchholtz, & Kolb, 2010). Firms with managers who have more shares

can be seen as more aligned with shareholder interests as these managers have to bear to a

greater extent their own decision-making according to agency theory. Hence, firms with lower

managerial ownership are more likely to be targeted by shareholder activism (Prevost & Rao,

2000; Faleye, 2004). Taking a broader perspective, the social activism stream finds that, in

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terms of ownership concentration, more diffused ownership leads to more constraints to

address social concerns (Judge, Gaur, & Muller‐Kahle, 2010). Minority owners invest less

money in their local communities than majority owners and are therefore inclined to show

less ‘responsible’ ownership (Adams & Hardwick, 1998; O’Rourke, 2003). From the

institutional perspective, this means that firms with less concentrated ownership are likely to

be confronted with more diverse demands compared to firms with more concentrated

ownership. When firms face multiple conflicting demands they are more prone to ignore some

elements, one of these being, for example, social concerns (Child & Tsai, 2005). Therefore,

firms with more concentrated ownership are likely to be targeted by shareholder activism.

Lastly, firms with a misalignment between executive compensation and firm performance

also cause shareholder activism because it represents a lost chance in alleviating the agency

problem (Ertimur, Ferri, & Muslu, 2010; Cai & Walkling, 2011). If managers do not produce

sufficient cash flows to justify their pay, they are likely to be targeted or pressured by activists

to reduce their compensation (Murphy, 2002).

2.2.2 Activist antecedents

Despite the focus of most prior empirical research on firm-level antecedents, the own

characteristics of shareholder activists are also theorized to have an influence in their

engagement in activism (Ryan, & Schneider, 2002; Sikavica, & Hillman, 2008). Considering

the capacity, interests, and salience of activists are therefore important in creating a full

picture of shareholder activism. First, activists’ capacity and interests in engaging in activism

could be decoupled from the target firm’s financial and governance situation. Activism costs

vary greatly, from shareholder proposals that require a minimal $2,000 investment in the firm

(Ertimur et al., 2010) to a price tag of multiple millions for hedge funds activism (Gantchev,

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2013), and to justify its costs activists have to either derive an adequate improvement in

overall shareholder wealth or look for benefits that are not shared by all other shareholders

(Kumar & Ramchand, 2008). Hence, investors’ ability and desire to engage in activism can be

affected by their fund size (a larger fund size allows activists to spread risks and expenses of

activism; see Ryan & Schneider, 2002) and investment horizons (longer investment horizons

allow the spreading of activist’ expenses; see Rubach & Sebora, 2009). Second, shareholders

that possess superior salience and negotiating leverage relative to managers or that have the

ability to gain other shareholders’ support could be more willing to engage in activism

because they expect greater returns on their activism investments (Kang & Sorensen, 1999).

This self-selection would imply that these powerful investors may be more likely to become

activists (Chandler, 2006; Chowdhury & Wang, 2009). Proposals by institutional investors,

for example, have historically received much higher approval rates than those initiated by

individual investors (Proffitt & Spicer, 2006).

2.2.3 Environmental antecedents

The third and last antecedent that provokes shareholder activism is the macro environment. In

the macro environment, changing conditions can either have a direct or indirect effect on

activism. The institutional environment can change due to altering societal norms and

behavior, which can result in new or modified rules in the legal environment (Del Guercio,

1996). Additionally, technological changes, such as improved communication techniques,

have lowered shareholder activists’ costs and ease of engaging in activism (Wessel, 2011).

Next to these direct effects, indirect effects of the macro-environment have also affected the

behavior of managers. Managerial actions are affected by their environment (Hambrick &

Abrahamson, 1995), which in turn influences the relation between corporate governance and

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shareholder activism (Giroud & Mueller, 2011). Managers may find it easier to observe and

react to shareholder activism at identical firms in their environment, thereby assisting

spillover effects and mimetic isomorphism (Lee & Park, 2009).

2.3 Process and outcomes of shareholder activism

Now that the motivation and triggers of shareholder activists are revealed, the actual process

of activism and its effects on firm-level outcomes can be discussed. The process of activism

starts when shareholders arrive at a point that they become increasingly dissatisfied with their

firm’s policies, actions, and choices. At this point, they can opt for three choices, which have

traditionally been classified as loyalty (hold), exit (trade), or voice (activism) (Davis &

Thompson, 1994). Voicing concerns can be done utilizing a variety of tactics, ranging from

public activism, by for example shareholder proposals, media campaigns, and publicized

letters (Song & Szewczyk, 2003; Reid & Toffel, 2009), to private activism, by for example

private negotiations, phone calls, and letters (Becht et al., 2009; Logsdon & Van Buren,

2009). Especially filing shareholder proposals present shareholders with a cheap and

relatively simple way to present matters to the company's owners (Thomas & Cotter, 2007).

Filed proposals can thereby play an essential role in shaping firm practices by facilitating the

fulfillment of activists’ demands or by sending powerful signals to managers and influence

their actions (Ferri & Sandino, 2009; Hillman et al., 2011).

Combined, the mechanisms outlined above have important implications for firms that

become targeted by shareholder activists. Although shareholder activism has been growing

exponentially over the last decades and is now widespread (Renneboog & Szilagyi, 2011;

Sullivan & Cromwell, 2014), its effectiveness on firm-level outcomes remains questionable.

Throughout literature, there are three competing views on this relationship. First, there is the

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value-creating view, which sees activist efforts as helping to improve the incentive and

control problems that characterize large diffusely held firms. According to this view,

shareholder activism increases firm social performance (e.g., Guay, Doh, & Sinclair, 2004;

Clark & Crawford, 2012), as well as financial performance (e.g., Brav et al., 2008; Cunat et

al., 2012), the latter one often via a governance-based way. Second, there is the value-

destroying view, which views shareholder activism as an impairment on firm management

and operations because activists neither have the skills nor the experience to improve

managers’ decisions. Due to shareholder interference firm financial performance (e.g., Bizjak

& Marquette, 1998; Cai & Walkling, 2011) and social performance (e.g., Johnson &

Greening, 1999; Prevost & Rao, 2000) are lowered. Lastly, the third view on the effectiveness

of shareholder activism outcomes considers activism as having a negligible impact on

governance-based firm financial performance (e.g., Carleton, Nelson, & Weisbach, 1998;

Becht et al., 2009) and social performance (e.g., Waddock, 2003).

The mixed results on the effectiveness of shareholder activism may be explained by

the heterogeneity of activists’ demands, as well as the divergent streams of theories used

throughout literature (Karpoff, 2001). Although scholars have long been aware of these

differences, they have had only little consideration for their implications in the methodology

of their studies. Consequently, most of the literature on shareholder activism arrives at

varying explanations for the different performance implications of shareholder activism

mentioned above (Goranova & Ryan, 2014). Individually these studies thus offer different

performance explanations, however, collectively they suggest that shareholder activism is a

complex phenomenon, and thus a distinction should be made between different types of

activist’ demands. The process of shareholder activism (filing different shareholder proposals)

in itself, therefore, plays an essential role in determining what firm-level outcomes of

shareholder activism will be. Additionally, what should also be taken into account in this

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relationship, are the characteristics of activists. The characteristics of activists can namely

influence whether shareholders actually choose to engage in the process of activism or not.

Especially foreign institutional ownership as an activist characteristic may be effective in

realizing the performance effects of shareholder activism because this allows activists to

realize performance effects through salience and extensive monitoring and control (Desender

et al., 2016).

2.4 Hypotheses

The review of the literature relating to shareholding activism reveals that results for the

relationship between shareholder activism and firm financial and social performance are

mixed. Important to note is, however, that these mixed results may be explained by the use of

only one explanatory variable in most studies. Additionally, it becomes clear that the process

of filing shareholder proposals is essential in explaining these two different firm-level

outcomes. Combined, it can be argued that both a multidimensional construct of shareholder

activism as well as a two-way distinction of firm performance outcomes can reasonably

explain the relationship between shareholder activism and firm performance. Therefore, this

study adopts governance-based shareholder proposals in capturing the relationship between

financial shareholder activism and firm financial performance, and social-based shareholder

proposals in capturing the relationship between social shareholder activism and CSP. As there

are many different types of shareholder proposals, each with its own effect on performance, it

is essential to distinguish between them. Karpoff et al. (1996) classify shareholder proposals

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in different categories: (1) executive compensation, (2) corporate governance, and (3)

environmental/social1.

2.4.1. Shareholder activism and firm financial performance

The first dimension of shareholder activism that influences firm performance is based on

governance-related shareholder proposals. Governance-based types of shareholder proposals

are thereby proposed by shareholders in order to improve the firm’s financial performance

(Gillan & Starks, 2000, 2007). Using the categories introduced by Karpoff et al. (1996), the

first two of these categories are, unsurprisingly, of the greatest interest to financially

orientated shareholder activists (Romano, 2001).

The first category, executive compensation, relates to the alignment of executive

incentives with firm objectives: mechanisms that motivate behavior. Agency theory predicts

that managers are unlikely to act in maximizing shareholder wealth unless it is in their self-

interest to do so (Ertimur et al., 2010). Allowing shareholders to express their opinions and

have a say in executive compensation may reduce the agency costs between executives,

directors, and shareholders, as it would result in increased accountability and communication

between these parties (Davis, 2007). It puts pressure on the executives to improve

performance, given that shareholder proposals with a negative content may have substantial

consequences on the support for the executives within the firm (Fama, 1980). Consequently,

shareholder proposals on executive compensation can result in increased shareholder

incentivizing and monitoring (i.e. more efficient compensation contracts) which add value to

1 While Karpoff et al. (1996) classify shareholder proposals into four categories, I combined their category of

internal corporate governance and external corporate governance to create corporate governance, similar to

related research (Bethel & Gillan, 2002). Additionally, I changed one of their categories name from ‘Other’ into

‘environmental/social’ in this paper, similar to related research (Thomas & Cotter, 2007).

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the firm by holding executives accountable (Cunat et al., 2015; Deane, 2007). Hence, I

hypothesize:

Hypothesis 1: Filing executive compensation-related shareholder proposals will be positively

related to a firm’s financial performance

The second category, corporate governance, relates to the controls that are used by

shareholders to monitor managers so that these managers become aligned with firm

objectives: mechanisms that constrain behavior. The board of directors thereby is the primary

and dominant corporate governance mechanism that is charged with overseeing executive

decisions (Fama, & Jensen, 1983). In terms of board structure, it is essential that directors are

qualified and, most of all, independent, as these characteristics make directors better monitors

(Vafeas, 1999; Krivogorsky, 2006; Ravina & Sapienza, 2009). Managerial entrenchment

theory predicts that an insider-dominated board, especially one with a CEO that serves a dual

role (he/she is also chairman of the board) is seen as a device for managerial entrenchment as

this kind of board may consolidate power and authority, which can weaken the board's overall

monitoring effectiveness (Solomon, 2007). Additionally, without relevant expertise of

(outside) directors, the board may be ineffective (Dalton & Daily, 1999). Powerful insiders

may be driven by self-interest and unless they are not restricted, they will engage in self-

serving activities that can be harmful to firm performance (Deegan, 2006). Such a self-interest

activity is to place takeover defenses in position that can make hostile takeovers too costly,

and thereby denying shareholders the gains from these transactions (Jarrell, Brickley, &

Netter, 1988). Takeover defenses can be used as means to weaken the takeover market as a

check on the behavior of management, as raising the cost of takeover reduces its probability

(Jarrell & Poulsen, 1987; Bebchuk, Coates & Subramanian, 2002).

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When a board’s structure can be altered to a board that is more independent and better

qualified, it can promote the shareholders' interests (Brickley & Zimmerman, 2010) and also

remove value-decreasing takeover defenses (Guo, Kruse, & Nohel, 2008). Consequently,

shareholder proposals on corporate governance can result in the de-entrenchment of

management, increased shareholder monitoring (i.e. stronger corporate governance

mechanisms), which increase the target firm performance. Hence, I hypothesize:

Hypothesis 2: Filing corporate governance-related shareholder proposals will be positively

related to a firm’s financial performance

2.4.2. Shareholder activism and firm social performance

The second dimension of shareholder activism that influences firm performance is based on

social-related shareholder proposals. Social-based types of shareholder proposals are thereby

proposed by shareholders in order to improve the firm’s CSP. The third category from

Karpoff et al. (1996), environmental/social, is therefore of the greatest interest to socially

orientated shareholder activists. This category relates to raising awareness, directing attention,

and challenging firms to improve their CSP (Wood, 1991). In comparison to the other

dimension of shareholder proposals, social-based shareholder proposals are often filed with

not only the intent to rally the shareholders of the target firm but also to reach and influence

other stakeholders, such as the firm’s employees and customers. Current and potential

employees may respond in a negative manner when they become aware of shortcomings in a

firm’s CSP through proposals (Turban & Greening, 1997). Regulatory agencies may also be

warned by activist’ proposals and may take them into consideration when designing

regulation. Customers can become aware of issues that can affect their willingness to buy

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goods from the firm, or they may even start their own campaigns via boycotts (Hoyer &

Maclnnis, 1997). Consequently, shareholder proposals on social/environmental issues can

result in managers becoming alerted to the underlying CSP problems and the need for change,

which leads them to evaluate the possibility of corrective action and to make changes to

improve CSP. Hence, I hypothesize:

Hypothesis 3: Filing environmental and social-related shareholder proposals will be

positively related to a firm’s social performance

2.4.3. The moderating effect of foreign institutional ownership on the shareholder activism

-firm performance relationship

While the above reasoning provides insights into the performance impact of shareholder

activism, it does not incorporate any ownership-level antecedents. However, it is after all the

owners of the firm, the shareholders, who decide to engage in activism. When a firm has a

highly diffused ownership, there is no incentive for any owner to monitor management

because the individual shareholder would have to carry the total monitoring costs, while all

the other shareholders would enjoy the benefits. Because of this, large(r), more salient

shareholders are argued to have sufficient incentives to monitor firms (Kang & Shivdasani,

1995; Noe, 2002). In terms of salient/large shareholders, institutional investors have become

an important participant in equity markets, giving them the potential to influence

management’s activities directly via their ownership and indirectly by trading their shares.

Additionally, due to increasing financial globalization and liberalization, it has become easier

for institutional investors to acquire ownership in firms other than those located in their home-

country (Bekaert & Harvey, 2000). Because of this, equity ownership by foreign institutional

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investors has been growing, which in turn can have an important impact on the relation

between shareholder activism and firm performance.

Institutional investors have the power to pressurize firms to comply with their needs

regarding performance as they possess monitoring capabilities and negotiating leverage due to

the fact that they commonly own large(r) blocks of stock within a firm (Chaganti &

Damanpour, 1991). Like any other shareholder, they also can directly influence management

using their ‘voice’, by voting on shareholder proposals. Gillan & Starks (2003) highlight the

particular role that institutional investors, especially foreign institutional investors, play in

inducing change in corporate governance worldwide. Foreign institutions often take a more

active stance compared to domestic institutions. As domestic institutions have business

relations with local corporations, they may feel compelled to be loyal to management

according to business relationship theory (Desender et al., 2016). Foreign institutional

investors would, therefore, voice their interests quicker and louder than domestic institutional

investors as they are less likely to have business relations with the firm. This increased

independence increases the ability of foreign institutional investors to monitor the firm. The

monitoring of the firm becomes especially important in the case of shareholder activism via

proposals, as these proposals are non-binding (Thomas & Cotter, 2007). Although proposals

may receive strong support from shareholders, management may decide to not follow-up on

them. However, with greater FIO, the probability that management will follow-up on

proposals is likely to increase due to the stronger, more independent, monitoring capacity of

foreign institutional investors. In turn, this can have a positive effect on performance.

Therefore, firms that are owned to a higher degree by foreign institutional investors

obtain/achieve a larger impact from the different categories of shareholder proposals than

firms with a lower level of FIO. Specifically, for the first dimension of shareholder proposals,

that is governance-related proposals (i.e. executive compensation- and corporate governance-

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related proposals), firms with higher FIO can achieve higher revenues due to a limitation of

agency problems within that firm resulting from increased monitoring and control activities.

Hence, I hypothesize:

Hypothesis 4a: Higher foreign institutional ownership of firms will positively moderate the

positive effects of both categories of filing governance-related shareholder proposals on a

firm’s financial performance

For the second dimension of shareholder proposals, that is social-related proposals, a higher

FIO of a firm would mean that firms have to increasingly deal with social activists that voice

their concerns quicker and louder (Chappie & Moon, 2005; Oh, Chang, & Martynov, 2011).

In turn, this would mean that other stakeholders can easier become aware of shortcomings in a

firm’s CSP and undertake their own action. Managers would then be alerted to a greater

extent to CSP problems, thus resulting in a stronger perceptiveness to these problems and an

increased need to take corrective actions that would improve CSP. Hence, I hypothesize:

Hypothesis 4b: Higher foreign institutional ownership of firms will positively moderate the

positive effects of filing environmental and social-related shareholder proposals on a firm’s

social performance

2.5 Conceptual model

From the provided theoretical framework and hypotheses a conceptual model can be derived,

as shown in Figure 1. This figure shows the proposed positive relationship between the

independent variables of governance-related shareholder proposals on the dependent variable

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firm financial performance (H1-H2) as well as the proposed positive relationship between the

independent variable of social-related shareholder proposals on the dependent variable firm

social performance (H3). Additionally, the positive moderating effect of the variable FIO on

the proposed shareholder activism performance relationship is incorporated in the model.

Figure 1: Conceptual model

3. Research methodology

3.1 Data collection

In order to test the presented hypotheses, this section will outline the research methodology.

The previously described shareholder activism-performance relationship and the moderating

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effects of FIO on this relationship will thereby be studied by a quantitative approach. The

secondary data that is used for this approach comes from several databases. The data for the

independent variables, the three categories of shareholder proposals, is obtained via the

website ProxyMonitor.org, a website managed by the Manhattan Institute, a public,

nonpartisan, independent, free-think tank consisting of scholars. Their database records all

proxy proposals submitted by shareholders of the 250 largest American public companies for

annual shareholder meetings. For the dependent variable firm financial performance as well as

for the moderating variable FIO and all the control variables, data is obtained via a database

called Orbis, which is provided by Bureau van Dijk. This database covers financial, statistical,

market, and corporate governance-related information from publicly traded companies.

Lastly, for the dependent variable firm social performance data is obtained via a database

provided by Thomson Reuters EIKON: ASSET4 ESG.

3.2 Sample

The initial sample of this study focusses on the largest 250 U.S. public companies as ranked

according to their revenue by Fortune magazine. The ranking published in 2015 is used. As

mentioned earlier, activists normally target large companies because they are more difficult

for shareholders to monitor effectively and are more sensitive to challenges to their social

legitimacy (Del Guercio & Hawkins, 1999; Rehbein et al., 2004). Additionally, the U.S.

activist investing market is a mature market with a lot of activity, especially when compared

to other countries, due to its market-oriented governance systems and the dominant role of

shareholders over other stakeholders (Weinstein et al., 2019). Furthermore, U.S. markets and

firms typically have the best data coverage. Taking this into account, a U.S. based sample of

the largest publicly traded firms would make an interesting sample to test. After collecting the

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data, 240 companies are included to form the final sample2. This is sufficient for a good

sample size given the rule of thumb that a sample should include at least 10 observations per

variable (VanVoorhis & Morgan, 2007).

3.3 Measurement of variables

3.3.1. Independent variables

The literature review reveals that the three different categories of shareholder proposals each

have their own effect on firm performance. Following Karpoff et al. (1996), this study

composes the different categories by grouping individual shareholder proposals into these

categories. First, with regard to the category of executive compensation-related shareholder

proposals, Say-on-Pay (SoP) and Say-on-Frequency (SoF) proposals are used to measure

activism. Second, for the category of corporate governance-related proposals, chairman

independence, director qualification, confidential and cumulative voting, declassify the board,

rescinding poison pill and removal of golden parachutes proposals are applied. Lastly, human

and animal rights, diversity, environmental, gender equality, lobbying and political spending

are utilized for the third category of social/environmental-related proposals. For a more

detailed overview of the different shareholder proposals see Appendix A.

How the exact measurement of shareholder activism should be performed is, however,

debated in literature. The survey study of McCahery, Sautner & Starks (2016) finds that

shareholders most frequently use ‘voice’ in their activist engagement, rather than ‘exit’.

Voicing concerns can be done utilizing a variety of tactics, ranging from public activism, by

for example shareholder proposals, media campaigns, and publicized letters (Song &

2 Out of the 250 firms, 10 firms did not receive a proposal in 2015 and are thus excluded.

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Szewczyk, 2003; Reid & Toffel, 2009), to private activism, by for example private

negotiations, phone calls, and letters (Becht et al., 2009; Logsdon & Van Buren, 2009).

Especially shareholder proposals present shareholders with a cheap and relatively simple way

to present matters to the company's owners. Although shareholder proposals are non-binding,

they can play a critical role in facilitating the implementation of activists’ demands by

sending powerful signals to management (Hillman et al., 2011). Hence, following previous

research (e.g., Karpoff et al., 1996) I operationalize shareholder activism as the filing of each

of the three identified shareholder proposals categories in the year 2015. In order to be able to

conduct a regression analysis (they can only be run with ratio measured variables and dummy

variables), I dummy code whether or not a proposal is filed to a specific company. Receiving

a proposal receives a one, while not receiving a proposal receives a zero in the data. Important

to note is that while shareholder activism for both the categories corporate governance and

social/environmental–related proposals are measured using the filing of proposals to a target

firm (via a dummy), the category executive compensation-related proposals is measured using

the percentage of votes in favor that filed proposals received from the shareholders in a

shareholders meeting (also done in the study of Thomas & Cotter (2007)). This is done

because almost all the firms in the sample received an executive compensation-related

proposal. Dummy coding would therefore not be a good measure.

3.3.2. Dependent variables

In order to measure firm financial and social performance, two different kinds of metrics are

used. For financial performance return on assets (ROA) is used, whereas for social

performance a combined ESG score is used. Previous studies on shareholder activism usually

measure firm financial performance via one of two different metrics, choosing either market-

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based measures (e.g., stock returns around announcement dates of shareholder proposals) or

accounting-based measures (e.g., ROA). Market-based measures, however, bring about

substantial event date uncertainty and other problems, which can undermine the ability of an

event study to detect the impact of proposals (Del Guercio & Hawkins, 1999), making an

accounting-based measure much more effective (Del Guercio, Seery, & Woidtke, 2008).

Hence, I operationalize a firm’s financial performance as ROA, which can be calculated by

dividing a firm’s net income by the total value of the firm’s assets at the end of the period (see

formula 1). This measure indicates how efficient a company is in using its assets to generate

earnings. Important to note here is that the effects of shareholder activism are likely to show

up only gradually over time (Karpoff et al., 1996; Del Guercio et al., 2008), making the

adoption of a change in ROA over multiple years necessary (Gillan & Starks, 2007). In order

to fully measure the impact of shareholder activism on ROA, I thus use a measure that takes

into account both prior operating performance and post-activism operating performance.

Therefore, following Karpoff et al. (1996), I calculate ROA one year before the firm receives

a proposal (i.e. 2014) and three years after the received proposal (i.e. 2018) and then measure

the percentage difference between these two. As the outcome of this is a percentage that can

take any value, both positive and negative, this makes it a continuous variable.

Formula (1): ROA =Net income

End of period assets

The other dependent variable, firm social performance will be measured by a combined ESG

score compiled by Thomson Reuters ASSET4. This combined score is an overall company

score based on the reported information by companies from 10 themes (e.g., emissions,

product responsibility, CSR strategy, etc.) categorized in three pillars: the environmental,

social, and governmental pillars. Thomson Reuters discounts the reported scores by

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companies with a controversies overlay (an ESG performance score based on negative media

stories) as this increases the accurateness of the overall ESG score. This measure is also

commonly used by previous studies (Velte, 2016). Following previous research, a lag of one

year is chosen in order to fully take into account the effects of shareholder activism on firm

social performance (David et al., 2007). The combined score is a number that can range

between 0-100, which makes it a continuous variable.

3.3.3. Moderating variable

As (foreign) institutional investors3 need to be registered in the U.S. with a separate filing (13-

F), they can be identified accordingly. As such, previous studies have used 13-F filings to

identify the involvement of (foreign) institutional investors in firms (Elyasiani & Jia, 2017).

This study uses a similar approach. Following Ferreira & Matos (2008), the moderator will be

measured as the proportional number of shares owned by foreign (other than U.S.)

institutional investors (see formula 2) in the year 2015. As the outcome of this measure is a

percentage which can take any value, both positive and negative, this makes it a continuous

variable.

Formula (2): Foreign institutional ownership =Shares owned by foreign institutional investors

Total outstanding firm shares

3 (Foreign) Institutional investors used in this study are: banks, insurance companies, private equity companies,

hedge funds, venture capital companies, pension funds, foundations/research institutes, public authorities.

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3.3.4. Control variables

In order to control for the potential influence of other factors on a firm’s financial and social

performance, four control variables are used in this study. First, firm size is controlled for

because this is expected to be related to firm performance. Larger firms can achieve

economies of scale and scope resulting in stronger performance (Thomas & Cotter, 2007).

Firm size is measured in this study as the natural logarithmic value of the firm’s total annual

assets in the year 2015. This measure can take any positive value and is therefore measured as

a continuous variable. Second, financial leverage is used as a control as this allows firms to

use debt in order to acquire additional assets, which can result in higher performance (Karpoff

et al., 1996). As a measure, the ratio in 2015 of total long-term debt divided by shareholder’s

equity is used, which is a continuous variable. Third, the firm’s age might also influence

financial and social performance. As the firm gets older it accumulates knowledge and

experience, which can feasibly influence its performance (Murphy, Trailer & Hill, 1996).

Firm age is measured in this study as the difference in years between the firm’s year of

inception and 2015. This variable is measured as a discrete variable because it can take any

integer value bigger than zero. Last, industry effects are also included as a control variable in

this study as prior research shows that the type of industry the firm operates in influences firm

performance (e.g., Schmalensee, 1985). Industry types were initially categorized using 3-digit

SIC codes, but this obtained over fifty codes. Since this categorization was too detailed for

further statistical analysis, the categorization was scaled to four categories following Cuervo-

Cazurra et al. (2018). These four different industry sectors are (1) natural resource-based

industries; (2) manufacturing industries; (3) service industries; (4) others (see also Appendix

B). As this is not a ratio variable, it is required to create dummy variables. Therefore, the first

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three4 categories are dummy coded into either a value of one if the firm operates in the

corresponding industry or zero if this is not the case.

3.4 Empirical data analysis

In order to test the suggested hypotheses, IBM SPSS version 24 is used. As the study

examines multiple independent variables to explain two continuous dependent variables, two

separate multiple linear regressions analyses are appropriate to use. Since there are

moderation effects in this study, moderated multiple regressions are used. This requires the

independent variables and the continuous moderator FIO to be mean-centered for the analysis,

as well as the computing of interaction variables (Hayes, 2013).

In case there is missing data for one of the variables, the firm is still included in the

analysis as this method (pairwise deletion) maintains valuable data (Enders, 2010).

3.5 Robustness tests

In order to test the sensitivity of the data and to make sure that the results have sufficient

validity, the regression analyses are first repeated by using data of shareholder proposals filed

in 2014 (combined with the corresponding data for all the other variables as specified in

methodology). Additionally, another period is chosen for ROA change: the difference

between ROA one year before the firm receives a proposal, to one year after the firm received

the proposal. This is done for both the 2014 and 2015 datasets. Also, another accounting-

based measure for the dependent variable financial performance is used for both years’

datasets: return on sales (ROS) (using the same change period as the original ROA measure).

4 The other industries is the baseline industry for the dummy effect

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ROS is also used in other shareholder activism-performance studies as a robustness test (e.g.,

Del Guercio & Hawkins, 1999), and can be calculated by dividing the MNC’s net income by

net sales (see formula 3). The outcome is a percentage which can take any value, both positive

and negative, making it a continuous variable.

Formula (3): ROS =Net income

Net sales

Finally, to check whether the identity of an activist shareholder has any influence in the entire

process, this study makes a broad classification of the different types of submitters of

shareholder proposals. This is done separately for each of the different categories of

shareholder proposals, except for the category of executive compensation-related shareholder

proposals since almost all the submitters for this category are the same in the obtained data

(i.e. “other”). For corporate governance-related shareholder proposals, proposals filed by

individuals are used, while for social/environmental-related shareholder proposals, proposals

filed by social institutions (i.e. religious institutions, socially responsible investing funds,

foundations) are used. Individual proposal submitters are chosen specifically for corporate

governance-related proposals as it is found in earlier research (Thomas & Cotter, 2007) that

the different types of corporate governance proposals filed by individuals receive, on average,

the most shareholder support compared to corporate governance proposals filed by other types

of submitters, which would thereby arguably lead to the wanted change/improvement in firm

financial performance. Additionally, social institutions are chosen as submitter group for

social/environmental-related proposals because it can be argued that they care for better

social/environmental firm performance and thereby thus engage in more intense campaigns

and monitoring in order to see their proposal bring about the wanted change/improvement. I

dummy code whether or not a specific type of proposal is filed to a company by a specific

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member of the abovementioned two groups, that is, individuals and social institutions. A firm

that receives a specific type of proposal from the abovementioned classified groups receives a

one (e.g., an individual filing a corporate governance-related shareholder proposal), while a

firm that receives a proposal from another type of activist shareholder in that shareholder

proposal category (e.g., a proposal filed by a labor union in the corporate governance-related

shareholder proposal category), as well as firms that do not receive a proposal at all, receive a

zero in the data. This robustness test is performed for both year’s datasets, 2015 and 2014.

4. Results

4.1 Test of basic assumptions

In order to check for any violations of the assumptions underlying regression analysis, four

basic assumptions are tested before performing a regression analysis. First, the assumption of

normality is assessed by checking for skewness and kurtosis as well as making P-P plots of

the regression standardized residuals. These plots show a linear relationship for the residuals

and therefore the assumption of normality is met. Second, the assumption of multicollinearity

is tested with the variance inflation factor (VIF). All the VIF values are below ten, except for

the control variables manufacturing industries and service industries. However, since these are

dummy coded and used as control variables multicollinearity is not an issue (Field, Miles, &

Field, 2012). Third, the assumption of independent errors should be met for doing regressions.

However, since this study does not use time-series data the errors will be dependent.

Therefore, the assumption of independent errors is met. Last, the assumption of linearity and

homoscedasticity is assessed by evaluating scatterplots with standardized residuals. These

scatterplots show randomly distributed dots, thus proving that there is no pattern and thereby

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meeting the assumption of linearity and homoscedasticity (Hayes, 2013). Additionally,

several outliers occurred during the data analysis. As these outliers might influence the

dataset, all variables are winsorized at 1% (except the dummies). For details see Appendix C.

4.2 Descriptive statistics

The descriptive statistics are presented in Table 1. Shareholder proposals that are submitted at

the 240 sampled firms are mostly executive compensation-related (231), then corporate

governance-related (63), and least of all social-related (58) (for the specific type of proposal

frequency per category see Appendix D, Table D.1-D.3). Regarding industry type, 28 firms

operate in natural resource-based industries, 78 in manufacturing industries, 129 in service

industries, and four in other industries (see Appendix D, Table D.4).

The data for the 2015 sample shows that the average change in ROA for a firm is .41%

(SD=5.05), which is quite alike to the robustness measure of the average change in ROS

(.58%; SD=7.25), while the average CSP score is 54.98 (SD=16.31). From the independent

variable executive compensation shareholder proposals, it becomes clear that shareholders

highly approve this proposal category, as on average 91.52% of the votes are in favor,

meaning that shareholders would like to see management implementing this proposal

category.

The 2014 sample used for robustness purposes, shows that a firm’s ROA is, on

average, -.59% (SD=5.47), which is again quite alike to the average change in ROS (-.41%;

SD=9.06), while the average CSP score is 54.04 (SD=17.12), meaning that both the kinds of

performance are a bit lower compared to 2015 (see Appendix E). The votes in favor of the

category executive compensation-related shareholder proposal remain relatively the same

(mean=93.04%). All in all, the variables remain almost unchanged.

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Table 1: Descriptive statistics 2015

Variable N Min Max Mean SD

Dependent variables

ROA change (%) 231 -12.31 13.49 .41 5.05

ROS change (%) 189 -19.51 20.08 .58 7.25

CSP 234 21.27 91.88 54.98 16.31

Independent variables

Ex. compensation SP (%)

231 70.71 99.63 91.52 7.70

Corp. governance SP

(dummy)

240 0 1 .26 .441

Social SP (dummy) 240 0 1 .24 .429

Moderating variable

FIO (%) 235 0 33.20 14.43 6.27

Control variables

Firm size 240 8.40 12.37 10.53 .61

Financial leverage (%) 197 -107.39 411.94 111.03 112.86

Firm age 240 0 165 44.11 36.91

Note: variables are presented in original form and not mean-centered. This table reports descriptive statistics

for all the variables used in this study. All variables, except the dummies are winsorized at the 1% level in both

tails. Presented are the number of observations (N), the mean, minimum (Min), maximum (Max) and standard

deviation (SD) of all the variables for the full sample.

4.3 Correlations

In order to check for the strength and direction of the linear relationship between the variables

a correlation analysis is performed, which is presented in Table 2 (2015 data) and in

Appendix F (2014 data). It can be seen in both datasets that the first two categories of

shareholder proposals (executive compensation and corporate governance) correlate

insignificantly with the change in ROA. This is also the case for the third category of

social/environmental shareholder proposals and CSP. The correlation analysis thereby

indicates that the probability of finding significant results in a multivariate setting is small.

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Table 2: Correlation matrix 2015

ROA change CSP

Ex.

Compensation

SP

Corp.

governance SP Social SP FIO Firm size

Financial

leverage Firm age

ROA change 1

CSP .106 1

Ex. compensation SP .010 .135*

1

Corp. governance SP .034 -.048

-.033 1

Social SP -.017 -.089

.005 .172**

1

FIO -.163*

.005 .036 -.012

-.089 1

Firm size -0.070 -.171**

-.089 .274**

.294**

.041 1

Financial leverage .095 .050 .001 .040 -.020 -.028 .066 1

Firm age -.059 .065 -.007 .114 .021 .033 .172**

-.099 1

Note: N=240; p<0.01**, p<0.05* (2-tailed)

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4.4 Regression results

The results of the main regression analysis can be found in Tables 3 and 4. As can be seen in

Table 3, six different models are used for the financial performance regression analysis. The

first model analyzes the effects of the control variables on firm financial performance. It can

be seen that none of these variables can explain the dependent variable at a significant level.

In model 2 the independent variable executive compensation-related shareholder

proposals is added in a separate manner to the control variables in order to test hypothesis 1.

The results show that this variable has a small positive (B=.003; p=.966), but insignificant

effect, also when looking at the general regression model 4 (B=.005; p=.950). As both models

do not support hypothesis 1, it can be rejected.

After this, the effect of the independent variable corporate governance-related

shareholder proposals on firm financial performance (hypothesis 2) is tested in model 3. From

Table 3 it becomes clear that the filing of corporate governance-related proposals also has a

positive but insignificant effect (B=.059; p=.433), which is confirmed in model 4 (B=.060;

p=.444). Therefore, both models do not support hypothesis 2, which can thus be rejected.

Model 5 shows that the moderating variable FIO has a negative direct and significant

effect on the dependent variable (B= -.155; p≤0.05). By adding the interaction terms in model

6, it becomes clear that although the variable itself can explain the dependent variable (B= -

.173; p=.035), it does not significantly interact with the two independent variables. Interesting

to note is that for one interaction effect, executive compensation-related shareholder

proposals, the interaction is negative (B= -.073), while for the other interaction, corporate

governance-related proposals it is positive (B=.073). This indicates that executive

compensation-related shareholder proposals seem to negatively interact with FIO, which is

contrary to hypothesis 4A, while corporate governance-related proposals seem to positively

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Table 3: Regression analysis 2015

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP .003 (.049) .005 (.049) .011 (.049) .009 (.049)

Corp. governance SP .059 (.887) .060 (.890) .055 (.882) .046 (.887)

Moderating variable

FIO -.155 (.059)** -.173 (.065)**

Interactions

Executive compensation SP X FIO -.073 (.009)

Corp. governance SP X FIO .073 (.178)

Control variables

Firm size -.070 (.620) -.070 (.624) -.087 (.645) -.086 (.648) -.078 (.642) -.056 (.656)

Financial leverage .093 (.003) .093 (.003) .091 (.003) .091 (.003) .087 (.003) .080 (003)

Firm age -.038 (.010) -.038 (.010) -.041 (.010) -.041 (.010) -.037 (.010 -.028 (.010)

Natural resource-based industries .028 (2.793) .027 (2.810) .016 (2.807) .015 (2.824) .007 (.2.797) -.021(2.837)

Manufacturing industries .041 (2.668) .040 (2.693) .020 (2.686) .019 (2.712) .008 (2.687) -.032 (2.720)

Service industries .066 (2.625) .064 (2.644) .050 (2.636) .048 (2.655) ..031 (2.631) -.012 (2.662)

R square .017 .017 .020 .020 .044 .054

Adjusted R square -.016 -.021 -.018 -.023 -.004 -.004

F-statistic .522 .445 .530 .462 .917 .924

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+3)

representing a firm’s net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed

executive compensation-related shareholder proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO

refers to foreign institutional ownership. There are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors

are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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Table 4: Regression analysis 2015

Social performance (CSP)

Model 1 Model 2 Model 3 Model 4

Independent variables

Social SP -.022 (2.918) -.021 (2.944) -.026 (2.954)

Moderating variable

FIO .008 (.188) .039 (.210)

Interactions

Social SP X FIO -.072 (.510)

Control variables

Firm size -.192 (1.946)*** -.185 (2.045)** -.186 (2.055)** -.198 (2.088)**

Financial leverage .070 (.011) .069 (.011) .069 (.011) .069 (.011)

Firm age .107 (.033) .106 (.033) .106 (.033) .102 (.033)

Natural resource-based industries .-.194 (8.764) .-.187 (8.886) -.187 (8.910) -.188 (8.916)

Manufacturing industries -.216 (8.370) -.209 (8.430) -.209 (8.453) -.201 (8.464)

Service industries .-.227 (8.236) .-.222 (8.279) -.221 (8.303) -.223 (8.309)

R square .050 .051 .051 .055

Adjusted R square .020 .015 .010 .008

F-statistic 1.642 1.412 1.231 1.176

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the corporate social performance score of firms.

Social SP refers to filed social/environmental-related shareholder proposals. FIO refers to foreign institutional ownership. There are 240 observations.

The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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interact with FIO, which is in line with hypothesis 4A. However, since the effects are not

significant, FIO does not seem to significantly positively moderate the shareholder activism

effects on financial performance and hypothesis 4A needs to be rejected.

Looking at Table 4, four different models are used to perform a CSP regression

analysis. Here, model 1 explores the effects of the control variables. It can be seen that firm

size is the only variable that can explain the dependent variable on a significant level

(p≤0.01). Model 2 then tests the effect of the independent variable social/environmental-

related shareholder proposals. The results show that social/environmental-related shareholder

proposals have a negative insignificant effect (B= -.022; p=.771), thereby rejecting hypothesis

3. Next, in model 3 the direct effects of the moderating variable FIO on CSP are tested. The

evidence shows that this variable has a positive insignificant effect (B=.008; p=.909).

When adding the interaction term in model 4, it becomes clear that there is a negative

(B= -.072) relationship for the moderating effect of FIO on the shareholder activism-CSP

relationship. However, given the fact that the B-coefficient is negative and insignificant, FIO

does not seem to positively moderate the relationship between social/environmental activism

and CSP. Therefore, hypothesis 4b is rejected.

4.5 Robustness tests results

The results for the first robustness test, the 2014 analysis, used to test the sensitivity of the

data, can be found in Appendix G. An important difference when compared to the main

regression analysis of 2015 arises with regard to the effect of the independent variables on

financial performance. Executive compensation-related shareholder proposals in models 2

(B= -.122) and 4 (B= -.124) appear to negatively influence financial performance at a

significant level (p≤0.1), which is the exact opposite of the effect that hypothesis 1 predicted.

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The other independent variable, corporate governance-related shareholder proposals, also

shows a negative effect (B= -.022) on financial performance, although at an insignificant

level. Looking at the interaction effects in model 6, these still both remain insignificant in the

2014 analysis, thus rejecting hypothesis 4a. Next, the robustness CSP regression of 2014 also

changes in quite some important ways to the main CSP regression of 2015. Although

social/environmental proposals remain to have a negative insignificant effect in both models 2

(B= -.119) and 3 (B= -.113), the effect of these proposals on CSP does become negative

significant in model 4 (B= -.400; p=.025). This means the exact opposite of the prediction that

hypothesis 3 made. The interaction variable of social/environmental proposals with FIO in

model 4 (B=.318; p=.077), on the other hand, shows a positive significant effect, which would

be in line with hypothesis 4b. However, given the negative relation between

social/environmental proposals and CSP in model 4, hypothesis 4b is still rejected.

The second and third robustness tests, using a different period for ROA, can be found

in Appendix H (2015 data) and Appendix I (2014 data). Both regressions are quite similar to

each other but somewhat different from the original ROA period used as the main regression

analysis above. In both the robustness tests, executive compensation-related shareholder

proposals have a negative insignificant effect on the different period of ROA. This, therefore,

rejects hypothesis 1. Also, hypothesis 2 is rejected as the effect of corporate governance-

related shareholder proposals on the different period of ROA is positive, albeit insignificant,

in both years’ datasets. The interaction effect of FIO and executive compensation-related

shareholder proposals in both robustness datasets is negative and insignificant, while for the

other interaction, corporate governance-related proposals, and FIO, it is positive insignificant.

This rejects hypothesis 4a.

The fourth and fifth robustness tests, using ROS instead of ROA to measure financial

performance (see Appendix J for 2015 data; Appendix K for 2014 data), verify most of the

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45

previous tests, although the coefficients somewhat change. Both the independent variables in

both years’ ROS regressions show an insignificant relationship with ROS, thereby rejecting

hypotheses 1 and 2. Also, the interactions for the independent variables with FIO indicate an

insignificant effect on ROS, thus rejecting hypothesis 4a.

The sixth and seventh robustness tests, using proposals filed by only specific

shareholder groups, can be found in Appendix L (2015 data) and in Appendix M (2014 data).

The results of both years’ ROA regressions show rather insignificant results, which is also

largely the case for the CSP regressions. Yet, it can be noted that in the 2014 CSP regression

social/environmental-related proposals filed by social institutions seem to have a negative

significant effect on CSP (B=-.118; p≤0.1) in model 2. However, since this result only occurs

in one model in one of both tested years, it should not be given too much attention.

All in all, these robustness tests show interesting results that are somewhat different

from the main regression analysis. Although they thereby offer an important empirical basis

for this study with regard to data sensitivity and validity, their results remain mostly

insignificant. Therefore, it would be interesting to refine the most important measure in the

analysis, that is, the measure for shareholder activism.

4.6. Regression results with a refined shareholder activism measure

In order to refine the shareholder activism measure, this study uses the percentage of votes in

favor of each of the categories of shareholder proposals. This measure is also often used in

other activism studies (e.g., Thomas & Cotter, 2007; McCahery, Sautner & Starks, 2016). The

explanation behind this refined measure is that proposals that receive higher percentages of

votes in favor increase the pressure on management because they are more likely to command

the attention of boards of directors and thus result in implementation. Stronger voting support

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46

is likely to urge shareholders backing the proposal in a more intense campaign for its

implementation and attracts greater press coverage, which increases the political costs of

ignoring the vote (Ertimur et al., 2010). Lower levels of voting support, on the other hand, are

consistent with the view that shareholders do not believe the issues raised in the proposal as

important to the firm.

The refined measure is operationalized as the percentage of votes in favor of each of

the three identified shareholder proposals categories in the year 2015 (and also in the year

2014 for a robustness test)5. In the case that a company receives multiple identical proposals

types in a year (e.g., multiple SoP proposals) the average amount of votes in favor of this type

of proposal is taken.

Several regressions are performed using this measure, first for both the years 2015 and

2014 using ROA as the dependent variable, and second for both the years 2015 and 2014

using ROS as the dependent variable. All these conducted regressions thereby show that the

refined measure of shareholder activism makes quite an impact in terms of the significance of

the coefficients. Important to note, however, is that these regressions have a smaller sample

(N≈50) compared to the main regression (N=240) and the robustness tests (N≈240), due to the

use of listwise deletion of missing data. The disadvantage of this smaller sample can be that

the results are somewhat less precise and generalizable, but when comparing the smaller

sample with the larger sample, the descriptive statistics do not differ that much (see Appendix

E). This indicates that the smaller sample is quite comparable to the larger sample and thus

also its results.

First, the results of the regressions that use ROA as a dependent variable can be found

for 2015 in Appendix N and for 2014 in Appendix O. Just as for the very first robustness test,

these analyses produce quite different results compared to the main regression analysis

5 As the outcome of this variable is a percentage it can range between zero and one hundred and is therefore

measured as a continuous variable.

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presented above, especially regarding the effect of activism on financial performance. Models

2 (2015: B= -.253; p=.055 (2014: B= -.338; p=.016)) and 4 (2015: B= -.267; p=.038 (2014:

B= -.354; p=.014)) show negative significant effects of executive compensation-related

proposals, thereby proving the exact opposite of hypothesis 1. This is also the case for the

negative significant effect of corporate governance-related proposals, which is supported in

models 3 (B= -.249; p=.070) and 4 (B= -.264; p=.048) of the 2015 dataset, thereby also

proving the opposite of hypothesis 2. The interactions from executive compensation-related

proposals and corporate governance-related proposals with FIO in these two analyses remain

the same in both analyses, namely all insignificant, thus rejecting hypothesis 4a. An exception

is the corporate governance shareholder proposal-related interaction with FIO in the

regression analysis of 2014, as this one is negative significant (B= -.407; p≤0.01). Contrary to

the abovementioned opposite effects of activism on financial performance when using a

different measure for activism, the effects of activism on CSP remain almost unchanged when

using the voting percentage robustness measure for both the years 2015 and 2014 and

comparing these with the main analysis, namely insignificant. As this is also the case for the

interaction of social/environmental proposals with FIO, hypotheses 3 and 4b can be rejected.

Second, the tests using ROS in combination with the percentage of votes in favor of

each of the categories of shareholder proposals can be found in Appendix P for 2015 and in

Appendix Q for 2014. Both these tests largely confirm the results mentioned above as found

is that both the independent variables have a negative effect on financial performance

(measured here as ROS), which is significant in 2015, but insignificant in 2014. Again, this is

the opposite of what hypotheses 1 and 2 predicted. In terms of the interactions for these two

tests, they both find insignificant, although varying, effects. An exception is the 2014

analysis, where a negative significant effect is found (B= -.299; p=.054) for the interaction of

FIO with corporate governance-related shareholder proposals.

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Overall, the robustness tests results, as well as the results from the tests using a

refined measure of shareholder activism, are quite different from the main regression analysis,

although not in the sense of their impact on the hypotheses. Both these differences and

similarities between the robustness tests and the main regression are evaluated in the

subsequent discussion part.

5. Discussion

The main objective of this thesis is to contribute to the debate on shareholder activism effects,

with a special focus on the effect that activism has on firm performance. By examining the

direct effects of three categories of shareholder proposals on both firm financial and social

performance, this thesis expands the knowledge of shareholder activism research. The results

of this study thereby indicate that almost all of the 250 largest U.S. listed firms do encounter

activism, at least in the form of proposals. In turn, the filing of, as well as the voting on, these

proposals generally lead to no or even negative effects on firm financial and social

performance. Additionally, although only sporadically tested in existing activism research,

interactions for foreign institutional ownership with the different proposal types are also

researched within this study. However, overall these do not show a lot of explanatory power.

Ever since the rise of shareholder activism in the mid-1980s, research on the topic has

remained mired in controversy. Despite important pro-shareholder regulatory modifications

over the past three decades, some scholars call for greater managerial accountability to firm

shareholders in order to enhance firm financial performance (Bebchuk, 2005). Nevertheless,

others denounce the view that firms only exist to fill the pockets of shareholders (Welker &

Wood, 2011) or warn that empowering shareholders will only aggravate the problem of

managerial self-serving with the problem of shareholder self-serving (Lan & Heracleous,

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49

2010). Yet another view is that corporations are not sufficiently accountable to the societies in

which they operate for their environmental and social impacts (O’Rourke, 2003). Each of

these alternative perspectives has thereby studied individual performance implications of the

activism phenomenon, without examining the mechanisms underlying its different aspects.

Taking a multidimensional construct of shareholder activism, however, can help clarify some

of the complexity of the activism-performance relationship. The multidimensional construct

that this thesis has taken, consisting of executive compensation-related, corporate governance-

related, and social/environmental-related types of proposals, as well as the two-way

distinction of firm performance in financial and social performance, thereby brings together

mechanisms from agency theory, institutional theory, managerial entrenchment theory, and

business relationship theory.

Focusing on the first category of shareholder proposals, executive compensation-

related proposals, the missing and even negative significant explanatory effects found in this

thesis for this type of proposal are in stark contrast with this study’s predictions, but in line

with the results of some other studies (e.g., Cai & Walkling, 2011; Larcker, Ormazabal, &

Taylor, 2011). Where this study namely theorized a positive relationship between shareholder

activism via executive compensation-related proposals on firm financial performance, the

opposite is found. An explanation for these results might be that the filing and voting on

executive compensation-related shareholder proposals do not lead to the effective monitoring

of compensation, but that these proposals rather are an intrusive measure which undermine

the board’s authority. The consequence of undermining the board’s freedom to decide may, in

turn, be value-destroying, since, for example, the board of directors is more informed about

the firm compared to an average shareholder, which would make the board be better placed to

make decisions. Similarly, CEOs and directors might have access to information that should

be withheld from the market. Next to this, given that shareholder proposals are non-binding, it

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can also be argued that these proposals have no effect on executive or director behavior, and

thus firm financial performance. Although these proposals are a cheap and relatively simple

way to present matters to the firm’s owners, they still have potential costs associated with

them. Legal costs, as well as costs of managing the relationship with investors, for example,

may result in a negative net effect when putting these proposals in place, even though when

they do not have an effect on performance (Cunat, Gine, & Guadalupe, 2015).

The significant negative findings as well as the insignificant findings on firm financial

performance in the regression analyses for the second category of shareholder proposals used

in this thesis, corporate governance-related proposals, is also the opposite of what was

hypothesized. This is in line with some prior research (Del Guercio & Hawkins, 1999; Gillan

& Starks, 2000), where an explanation for the negative results is that the filing and voting on

corporate governance-related proposals tend to undermine board stability and continuity and

thus can impair firm management. Shareholder activists may lack the skills and experience to

improve on managers’ decisions and their attempts to influence these can disrupt the firm’s

operations and degrade performance (Lipton & Rosenblum, 1991). Additionally, corporate

governance-related proposals might also lead to the removal of anti-takeover measures, which

when in place, would allow the board to have enough time and the right perspective to

accurately evaluate bids and solicit competing offers (Koppes, Ganske, & Haag, 1999; Faleye,

2007). Removing these anti-takeover measures could hurt firm performance as they give the

board of directors the ability to either negotiate higher premiums from legitimate acquirers or

ward off inadequate offers. Furthermore, it can again be argued that the non-binding nature of

shareholder proposals might play a role in explaining the insignificant results.

The hypothesized positive effect of filing and voting on the third category of

shareholder proposals, social/environmental-related proposals, on corporate social

performance is not supported in this study as the different conducted tests on their effect

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51

overall lead to insignificant results. This is contrary to what prior studies have found: positive

(Johnson & Greening, 1999) as well as negative relationships (David et al., 2007). One

possible explanation for this insignificant effect might be the earlier stated reason that

shareholder proposals can only achieve voluntary change by companies. Proposals are limited

to those who already have the power of ownership and to those who have the extra money and

time to undertake activism. Other less empowered and less vocal stakeholders have to be

content to be represented by benign shareholders. Another explanation for the found

insignificant effects might be that the structure of the shareholder activism process and the

rules themselves currently hold back significant improvements in terms of CSP. The process

of activism, as well as the rules, namely encourages firms to break down desired change into

objectives that can be done step by step. Each act of shareholder activism via a proposal can

only raise a very specific problem instead of a fundamental critique of business practices. As

a consequence, only small changes in CSP at each firm on each single raised proposal issue

can be achieved (O’Rourke, 2003).

In terms of the predicted positive moderating effect of FIO on the relationship between

the first two categories of shareholder proposals - executive compensation-related and

corporate governance-related proposals - and firm financial performance, the regressions

analyses lead to different results. Almost all of these results, however, show a rather

insignificant interaction effect for FIO. When taking a closer look at the results, it can be seen

that the moderating effects of FIO differ quite a lot, as the effects in some analyses show a

positive insignificant effect, and in others a negative insignificant effect. Two analyses even

show a significant negative interaction effect of FIO with corporate governance-related

proposals on financial performance, which is the opposite of what has been hypothesized.

However, as these significant results only occur in two tests, they do not seem to be very

relevant and may be caused due to small variations in the dataset. Therefore, the obtained

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results for the moderator FIO do not seem to be meaningful as most of the coefficients in this

analysis are too small to add meaning to the relationship. A possible reason for the

insignificance of this moderating effect might be that (foreign) institutional investors have to

make a trade-off between the costs and benefits of actively monitoring their investments.

Institutional investors will therefore not have the same incentive to monitor the activities of

every firm in their portfolios. Due to their heterogeneity, institutional investors’ monitoring

roles are related to institution type, their investment horizon, and their preference for trading

(Chen, Harford, & Li, 2007; Schmidt & Fahlenbrach, 2017). Although this study already

looked at one specific type of institutional investor, foreign institutional investors, a better

measure for this moderator might thus have been to further take into account the

heterogeneity of institutional investors and how their institutional characteristics (e.g., their

investment horizon) might affect the shareholder activism-performance relationship.

Lastly, FIO also does not significantly positively moderate the hypothesized social

shareholder activism-CSP relationship. Just as with the interactions of FIO with executive

compensation-related and corporate governance-related proposals, the interactions with

social/environmental-related proposals also seem to lead to different results, almost all being

insignificant. Again, a possible explanation for the insignificant moderation effects of FIO

might be the heterogeneity of institutional investors’ monitoring roles. Interesting to note is

that the direct effect of FIO on both firm social and financial performance also varies widely,

but that in this case there seems to be a significant direct effect of FIO for about half of the

conducted analyses. In other activism studies, institutional ownership is mostly used as either

an independent or control variable, where it often also has a direct positive effect on

performance.

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6. Conclusion

By studying the main research question: “What is the effect of shareholder activism on the

financial and social performance of firms and how is this relationship moderated by foreign

institutional ownership of firms?” this thesis contributes to the shareholder activism-

performance literature. The results of this study thereby have several relevant academic and

practical implications.

6.1 Theoretical implications

This study makes three theoretical contributions to shareholder activism-performance

literature. First, this study addresses the prior inconclusive empirical findings with regard to

the shareholder activism and performance relationship by taking a multidimensional construct

of shareholder activism combined with a two-way distinction of firm performance. By taking

this multidimensional construct of shareholder activism and firm performance, differentiation

is made between different aspects of shareholder activism that target firms, which can thereby

explain the activism process as well as its impact better and more thoroughly. The findings

point to the fact that the shareholder activism-performance relationship is a complex one, as

the results range from insignificant to even negative, depending on regression specifications,

and are contrary to this thesis’ predictions. The need, therefore, arises to take into account the

heterogeneity of activists’ demands as well as different underlying theoretical disciplines

when studying the performance effects of shareholder activism. Second, the findings show

that shareholder activism fails to offer strong support for the classic agency theory assumption

that shareholder monitoring will improve firm performance. The homogeneity of shareholder

interests, one of the key premises of agency theory, which assumes that the interests of

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54

activist shareholders are aligned with the interests of the remaining shareholders can thus be

challenged given this study’s results. Activists’ heterogeneity undermines the chance that the

interests of a given shareholder activist will be aligned with the interests of the firm’s other

shareholders. Finally, by taking into account differences between shareholders’ ability to

monitor both the activism process and firms in general, this study highlights the

differentiating role that this can play. To study this, an important characteristic of

shareholders, foreign institutional ownership, has been included in this study as this

characteristic can maximize the impact of shareholder activism. Although the results are

insignificant in this study, many other activism studies have only incorporated (foreign)

institutional ownership as either an independent or control variable (e.g., Karpoff et al., 1996;

Thomas & Cotter, 2007; Kang, Luo & Na, 2018). In these studies, (foreign) institutional

ownership does have a significant effect on firm performance, thereby indicating that it is

important in explaining shareholder activism. The impact should, therefore, be set and

interpreted in the right context, possibly by using more extensive measures.

6.2 Practical implications

Next to the theoretical implications, this thesis also has several relevant practical implications,

especially for both managers and shareholders. To begin with, this study shows managers and

shareholders that further shareholder empowerment can be expected to either decrease firm

performance and/or that it does not even have any significant effect on it. Since the financial

performance, and to some extent social performance, can be seen as the main goal of firms,

new knowledge about how this can be affected is very useful. By filing and voting on

proposals, shareholders may thus not impact and/or even hurt their firm’s performance. A

consequence of this implication is that shareholders need to thoroughly think through the

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content, impact, and need of their activist efforts before filing proposals. Similarly, members

of the board of directors need to keep open communication with disgruntled shareholders and

understand that activists bring varying motivations and agendas to the discussion.

Additionally, another implication from this study, one that is also shared by critics (e.g., Lan

& Heracleous, 2010), is that as shareholders do not owe a fiduciary duty to their portfolio

firms, shareholder activism may be decoupled from responsibility. The none to negative

effects that are found in this study may partly underline this criticism. The question, therefore,

arises in whose interest the public corporations should be managed.

6.3 Limitations and future research

Some limitations should be noted for this thesis. The first limitation is that of the used sample.

The focus on the largest U.S. companies namely makes the sample quite homogenous in

terms of size and nationality. Hence, the sample may rather be representative for very large

and American firms, instead of for firms that are smaller and located in other countries. This

limitation is also quite common in other activism studies, mainly due to limited data

availability of activism in other countries6. However, the focus on these companies might thus

hamper the reliability and generalizability of the results. Second, although the sample is

controlled for industry influences, only four different types of industries are controlled for.

While it is assumed that four categories are sufficient as this is also done in other studies, it

may be over-simplistic. Third, only one form of activism is researched within this study, the

filing and voting on proposals, but there are several other ways through which activists can

express their concerns, such as private negotiations with management and the selling of shares

(see e.g., McCahery et al., 2016). The last limitation present in this study was the needed

6 Although there is one database that has some global activism data, Institutional Shareholder Services (available

in WRDS), non-U.S. data availability is still very limited and has to be handpicked in global studies on activism.

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merger of two categories of shareholder proposals into one category: corporate governance.

Initially, this category was split into two separate categories: internal and external corporate

governance, which are also used in other activism studies (e.g., Karpoff et al., 1996), but due

to a limited number of data observations, these had to be merged.

Next to the limitations, several recommendations for future research can be derived

from this study. First, a more diverse and global sample of firms targeted by activism could be

used in future studies. Other countries, such as European ones, are attempting to allow more

shareholder activism (e.g., Croci, 2007), and foreign investors based in the U.S. are beginning

to pressurize firms outside the U.S. Second, the multidimensional construct of shareholder

activism could be further expanded by including more activism components (e.g., more

categories of proposals; more forms of activism) in order to paint a more comprehensive

picture of the activism-performance relationship. In terms of categories of shareholder

proposals specifically, it can, for example, be noted that shifts occur in the type of filed

proposals by activists. While external corporate governance-related proposals, such as rescind

poison pill proposals, were very popular and numerous in earlier studies (e.g., Karpoff et al.,

1996; Thomas & Cotter, 2007) compared to other categories, this category had to be merged

with the category internal corporate governance in this study since it had a limited number of

observations. Shifts such as this one might also occur in other categories, thereby potentially

giving need for a re-categorization of proposal types. Finally, although no moderating results

are found in this study regarding FIO, future research needs to discover the effects of

shareholder’s ability to monitor both the activism process and firms in general. It is possible

that some other shareholder characteristics can more powerfully influence activists to choose

different types of activism, which can eventually influence firm performance.

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57

Acknowledgments

First of all, I would like to express my gratitude to my supervisor professor Niels Hermes.

Thanks to his insightful and constructive feedback I was able to tackle several problems at

hand that occurred during the process of writing this thesis. Our interesting and thoughtful

discussions on the subject of activism and corporate governance really helped me to gather

and focus my thoughts and provided me with a better ability to look at a subject from different

angles. Second, I would like to thank my dear friends and family for their unconditional

support during my time as a student at the University of Groningen. They really made my

student life and everything around it an unforgettable ride.

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Appendices

Appendix A: Glossary of shareholder proposals

Executive compensation - Say-on-Pay SoP proposals are votes on the level of executive pay and whether this

level reflects the value that a CEO adds to the firm. It can be seen as an

explicit vote of confidence which combines the opinions of all

shareholders into a simple, highly visible metric. SoP can thereby

strengthen shareholder oversight and limit executive compensation

excesses (Cunat et al., 2015).

- Say-on-Frequency SoF proposals allow shareholders to vote on whether they prefer a SoP

vote each year, every two years or every three years. This kind of proposal

can help to increase the frequency by which shareholders are allowed to

vote on executive pay and thereby increase monitoring.

Corporate governance

- Chairman independence A CEO that serves a dual role (he/she is also chairman of the board) is seen

as a device for managerial entrenchment as this kind of board may

consolidate power and authority, which can weaken the board's overall

monitoring effectiveness (Solomon, 2007). Chairman independence

proposals grant shareholders the option to remove CEO duality in their firm which can halt managerial entrenchment and make directors better

monitors (Ravina & Sapienza, 2009; Brickley & Zimmerman, 2010). - Director qualification Without relevant expertise of directors, the board may be ineffective

(Dalton & Daily, 1999). Shareholder proposals on director qualifications

allow shareholders to appoint directors with the necessary qualifications. - Confidential voting A confidential process for proxy voting is designed to eliminate pressure

and potential conflicts of interest between managers and trustees who vote

shares on behalf of other parties. With confidential voting, management

agrees not to view individual proxy ballots unless the election is challenged

(Nelson, 2005). Shareholder proposals on confidential voting can mitigate

conflicts of interest between managers and shareholders. - Cumulative voting Cumulative voting allows shareholders to combine their votes for the

election of the board of directors and cast these votes in any way they

desire. With cumulative voting, the total number of votes a shareholder is

allowed to cast is the number of shares held times the number of directors

up for election. Cumulative voting provides minority shareholders a greater

ability to elect their favored directors (Nelson, 2005). Shareholder

proposals on cumulative voting can lead to better shareholder

representation in the board and thus to better managed firms (Bhagat &

Brickley, 1984). - Declassify the board A classified board is one where the election of the board of directors is

staggered over several overlapping ‘classes’ (typically three). Essentially,

having a classified board makes it more difficult for a successful bidder to

gain effective control over the board and hence the firm. Declassify the

board proposals enable shareholders to express their views on the

performance of all directors at each annual meeting, instead of having to

wait to elect directors at later meetings. This makes directors more

accountable to shareholders and can remove a serious barrier to a hostile

bidder seeking to gain control over a target board (Bebchuk et al., 2002).

- Poison pill Also called shareholder’s rights plans, poison pills are designed to force

potential acquirers to negotiate with the firm’s board of directors. If the

board views the deal as favorable, then the board can redeem the pill.

Otherwise, once the acquiring firm accumulates a certain level of stock, the

pill is ‘triggered’ granting shareholders the right to purchase stock in either

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company as a substantial discount. Unlike, many other antitakeover

devices, poison pills can be adopted without a shareholder vote. Proposals

on the removal of poison pills can prevent managerial entrenchment

(Malatesta & Walkling, 1988).

- Golden parachutes Golden parachutes, a type of severance contract, compensate managers for

the loss of their jobs resulting from a change in control. It can insulate

managers from the takeover, reduce managerial discipline and raise

takeover costs and likeability (Hall & Anderson, 1997). Removal of golden

parachutes via proposals makes firms more open to pressure from the

market for corporate control.

Environmental/social

- Human rights Shareholder proposals aimed at promoting, improving and ensuring that

firms deal appropriately with the basic rights and freedoms that belong to

every person in the world.

- Animal rights Shareholder proposals aimed at entitling animals to the possession of their

own existence and that their most basic interests, such as the need to

avoid suffering, should be afforded.

- Diversity Shareholder proposals aimed at promoting, improving and ensuring that

firms deal appropriately with diversity in companies. Usually, these type of

proposals wants firms to add disclosures with comprehensive workforce

data, or disclose results of diversity initiatives. Shareholders can have

insufficient information to determine if firms have a diverse workforce or have been successful in expanding diversity into senior roles.

- Environmental Shareholder proposals aimed at promoting, improving and ensuring that

firms deal appropriately with their environment.

- Gender equality Shareholder proposals aimed at promoting, improving and ensuring that

firms deal appropriately with gender differences.

- Lobbying/political

spending

Shareholder proposals aimed at ensuring and promoting that firms disclose

information on the amounts that are spent on lobbying.

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Appendix B: Industry types

For the control variable industry type, MNCs are classified in one of the following industry

types:

1. Natural resource-based industries: agriculture, fishing, mining, and oil and gas

2. Manufacturing industries: iron, steel, textile, and chemical processing

3. Service industries: transportation, telecommunications, retail, and other services

4. Others: the rest of the firms in the sample

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Appendix C: Preliminary analysis

Table C.1:

Test for multicollinearity

2015 2014

Model 4 (ROA) Model 6 (ROA) Model 4 (CSP) Model 4 (ROA) Model 6 (ROA) Model 4 (CSP)

Independent variables Tolerance VIF Tolerance VIF Tolerance VIF Tolerance VIF Tolerance VIF Tolerance VIF

Executive compensation SP .975 1.026 .952 1.051 .953 1.050 .926 1.080

Corp. governance SP .903 1.108 .893 1.120 .938 1.066 .117 8.576

Social SP .856 1.169 .143 7.016

Moderating variable

FIO .809 1.236 .792 1.263 .746 1.340 .817 1.224

Interactions

Executive compensation SP X FIO .885 1.130 .832 1.202

Corp. governance SP X FIO .809 1.236 .117 8.569

Social SP X FIO .748 1.337 .140 7.152

Control variables

Firm size .877 1.140 .838 1.193 .834 1.199 .881 1.135 .869 1.151 .917 1.091

Financial leverage .964 1.037 .959 1.043 .965 1.036 .977 1.024 .961 1.040 .979 1.022

Firm age .934 1.071 .925 1.081 .930 1.075 .927 1.079 .923 1.083 .900 1.111

Natural resource-based industries .169 5.932 .164 6.103 .167 5.986 .173 5.776 .172 5.809 .167 5.976

Manufacturing industries .086 11.649 .084 11.936 .087 11.483 .082 12.218 .081 12.306 .081 12.380

Service industries .079 12.651 .077 12.954 .080 12.540 .076 13.244 .075 13.725 .074 13.747

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69

Figure C.1-C.3 Test for homoscedasticity (2015 dataset)

C.1: Model 4 (ROA) C.2: Model 6 (ROA)

C.3 Model 4 (CSP)

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Figure C.4-C.6 Test for homoscedasticity (2014 dataset)

C.4: Model 4 (ROA) C.5: Model 6 (ROA)

C.6 Model 4 (CSP)

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Appendix D: Shareholder proposal and industry type frequencies

Table D.1

Executive compensation SP type

Frequency Percent

Say on Frequency 1 .4

Say on Pay 230 95.8

Total 231 96.2

Table D.2

Corporate governance SP type

Frequency Percent

Chairman independence 40 16.7

Cumulative voting 1 .4

Declassify the Board 2 .8

Golden Parachutes 20 8.3

Total 63 26.2

Table D.3

Social/environmental SP type

Frequency Percent

Animal Rights 1 .4

Environmental 30 12,5

Gender Equality 1 .4

Human Rights 4 1.7

Lobbying 21 8.8

Lobbying and Politic 1 .4

Total 58 24.2

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Table D.4

Industry type

Frequency Percent

Manufacturing industries

Natural resource-based industries

Other

Service industries

Total

78

28

4

129

240

32.5

11.7

1.7

53.8

100.0

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Appendix E: Descriptive statistics

Descriptive statistics 2014 dataset

Variable N Min Max Mean SD

Dependent variables

ROA change (%) 248 -14.92 16.44 -.59 5.46

ROS change (%) 208 -20.23 21.43 -.41 9.06

CSP 248 14.18 91.50 54.04 17.12

Independent variables

Ex. compensation SP (%)

250 75.67 99.85 93.04 6.04

Corp. governance SP

(dummy)

250 0 1 .20 .402

Social SP (dummy) 250 0 1 .18 .383

Moderating variable

FIO (%) 246 0 36.35 15.01 6.64

Control variables

Firm size 252 8.40 12.41 10.51 .62

Financial leverage (%) 213 -213.23 340.98 85.89 97.60

Firm age 250 0 164 43.37 36.92

Note: variables are presented in original form and not mean-centered. This table reports descriptive statistics

for all the variables used in this study. All variables, except the dummies are winsorized at the 1% level in both

tails. Presented are the number of observations (N), the mean, minimum (Min), maximum (Max) and standard deviation (SD) of all the variables for the full sample.

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Descriptive statistics 2015 dataset using % of votes in favor of a shareholder

proposals measure

Variable N Mean SD

Dependent variables

ROA change (%) 55 .55 5,08

ROS change (%) 45 1.23 7.42

CSP 48 53.47 17.41

Independent variables

Ex. compensation SP (%) 55 91.13 7.36

Corp. governance SP (%) 55 29.70 12.06

Social SP (%) 48 17.93 10.41

Moderating variable

FIO (%) 55 14.26 4.68

Control variables

Firm size 55 10.85 .60

Firm age 55 54.55 41.08

Note: variables are presented in original form and not mean-centered. This table reports descriptive

statistics for a subset of the sample. All variables, except the dummies are winsorized at the 1% level

in both tails. Presented are the number of observations (N), the mean and standard deviation (SD) of

all the variables.

Descriptive statistics 2014 dataset using % of votes in favor of a shareholder

proposals measure Variable

N Mean SD

Dependent variables

ROA change (%) 49 -.96 5.56

ROS change (%) 44 -1.40 8.40

CSP 41 52.40 18.65

Independent variables

Ex. compensation SP (%) 49 91.92 6.26

Corp. governance SP (%) 49 30.28 11.63

Social SP (%) 41 15.23 10.61

Moderating variable

FIO (%) 49 13.99 5.36

Control variables

Firm size 49 10.73 .68

Firm age 49 48.00 39.21

Note: variables are presented in original form and not mean-centered. This table reports descriptive statistics

for a subset of the sample. All variables, except the dummies are winsorized at the 1% level in both tails.

Presented are the number of observations (N), the mean and standard deviation (SD) of all the variables.

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Appendix F: Correlation matrix 2014

ROA change CSP

Ex.

Compensation

SP

Corp.

governance SP Social SP FIO Firm size

Financial

leverage Firm age

ROA change 1

CSP .033 1

Ex. compensation SP -.107 .031

1

Corp. governance SP -.035 -.007

-.081 1

Social SP -.117 -.079

-.005 -.053

1

FIO -.018*

.070 -.018 -.068

-.061 1

Firm size -0.075 -.127*

-.143*

.172**

.073

.016 1

Financial leverage .091 -.003 -.071 .041 .002 .057 .072 1

Firm age -.128*

.098 .035 .057 .070 .028 .211**

-.029 1

Note: N=240; p<0.01**, p<0.05* (2-tailed)

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76

Appendix G: Regression results robustness test 1 (2014 dataset)

ROA regression analysis 2014

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.122 (.064)* -.124 (.064)* -.125 (.064)* -.127 (.065)*

Corp. governance SP -.022 (.969)

-.029 (.966)

-.031 (.969)

.021 (2.758)

Moderating variable

FIO -.026 (.057) -.020 (.066)

Interactions

Executive compensation SP X FIO .009 (.012)

Corp. governance SP X FIO -.056 (.181)

Control variables

Firm size -.056 (.633) -.074 (.636) -.052 (.646) -.069 (.648) -.069 (.649) -.072 (.657)

Financial leverage .084 (.004) .076 (.004) .085 (.004) .078 (.004) .079 (.004) .077 (.004)

Firm age -.108 (.011) -.100 (.011) .-108 (.011) -.100 (.011) -.099 (.011) -.099 (.011)

Natural resource-based industries -.004 (2.923) .005 (2.910) -.001 (2.934) .009 (2.921) .006 (2.930) .005 (2.949)

Manufacturing industries .064 (2.769) .089 (2.761) .072 (2.793) .101 (2.785) .095 (2.797) .097 (2.814)

Service industries .143 (2.731) .178 (2.726) .149 (2.745) .186 (2.740) .182 (2.749) .181 (2.763)

R square .038 .052 .039 .053 .054 .055

Adjusted R square .010 .019 .005 .015 .011 .002

F-statistic 1.336 1.590 1.153 1.407 1.261 1.033

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+3) representing a firm’s net

income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related shareholder

proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There are 250

observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1

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77

CSP regression analysis 2014

Social performance (CSP)

Model 1 Model 2 Model 3 Model 4

Independent variables

Social SP -.119 (3.254) -.113 (3.259) -.400 (7.906)**

Moderating variable

FIO .079 (.175) .026 (.190)

Interactions

Social SP X FIO .318 (.519)*

Control variables

Firm size -.135 (1.940)* -.131 (1.933)* -.130 (1.931)* -.118 (1.931)*

Financial leverage .026 (.012) .028 (.012) .024 (.012) .026 (.012)

Firm age .102 (.032) .109 (.032) .106 (.032) .127 (.033)*

Natural resource-based industries -.032 (8.957) -.016 (8.937) -.007 (8.940) -.059 (9.037)

Manufacturing industries .093 (8.487) .064 (8.477) .086 (8.497) .030 (8.528)

Service industries .-.132 (8.370) .-.178 (8.393) -.162 (8.400) -.211 (8.408)

R square .075 .087 .094 .108

Adjusted R square .048 .056 .057 .068

F-statistic 2.759** 2.763*** 2.593*** 2.682***

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the corporate social performance score of firms.

Social SP refers to filed social/environmental-related shareholder proposals. FIO refers to foreign institutional ownership. There are 250 observations. The

other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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Appendix H: Regression results robustness test 2 (different ROA period 2015)

ROA regression analysis 2015 (using different ROA period)

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.107 (.044) -.105 (.044) -.101 (.044) -.099 (.045)

Corp. governance SP .110 (.801)

.107 (.799)

.105 (.798)

.100 (.804)

Moderating variable

FIO -.088 (.053) -.109 (.059)

Interactions

Executive compensation SP X FIO -.029 (.008)

Corp. governance SP X FIO .066 (.161)

Control variables

Firm size -.069 (.563) -.077 (.562) -.099 (.582) -.106 (.581) -.102 (.581) -.087 (.595)

Financial leverage .107 (.003) .109 (.003) .102 (003) .104 (.003) .102 (.003) .098 (.003)

Firm age .016 (.009) .015 (.009) .010 (.009) .009 (.009) .011 (.009) .018 (.009)

Natural resource-based industries -.271 (2.534) -.251 (2.532) -.293 (2.534)* -.273 (2.534) -.277 (2.530)* -.288 (2.573)*

Manufacturing industries .059 (2.420) .100 (2.427) .022 (2.425) .063 (2.433) .057 (2.430) .039 (2.466)

Service industries .085 (2.381) .120 (2.383) .056 (2.380) .091 (2.382) .081 (2.380) .061 (2.413)

R square .123 .134 .134 .145 .152 .157

Adjusted R square .094 .101 .100 .106 .109 .104

F-statistic 4.252*** 4.007*** 3.996*** 3.800*** 3.568*** 2.993***

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+1) representing a firm’s

net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related

shareholder proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There

are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1

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Appendix I: Regression results robustness test 3 (different ROA period 2014)

ROA regression analysis 2014 (using different ROA period)

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.033 (.044) -.030 (.044) -.029 (.044) -.039 (.045)

Corp. governance SP .048 (.658)

.046 (.660)

.050 (.663)

.128 (1.883)

Moderating variable

FIO .062 (.039) .061 (.045)

Interactions

Executive compensation SP X FIO .056 (.008)

Corp. governance SP X FIO -.086 (.124)

Control variables

Firm size -.033 (.430) -.037 (.436) -.042 (.438) -.046 (.443) -.046 (.444) -.054 (.448)

Financial leverage -.004 (.003) -.007 (.003) -.006 (.003) -.008 (.003) -.011 (.003) -.019 (.003)

Firm age -.062 (.007) -.060 (.007) -.062 (.007) -.060 (.007) -.063 (.007) -.063 (.007)

Natural resource-based industries -.315 (1.987)** -.313 (1.992)** -.321 (1.992)** -.319 (1.998)** -.312 (2.006)* -.318 (2.014)**

Manufacturing industries .031 (1.883) .038 (1.889) .013 (1.897) .020 (1.905) .034 (1.914) .034 (1.922)

Service industries .013 (1.857) .022 (1.866) .000 (1.864) .009 (1.874) .019 (1.882) .016 (1.886)

R square .113 .114 .115 .116 .120 .125

Adjusted R square .087 .084 .085 .081 .080 .076

F-statistic 4.335*** 3.735*** 3.778*** 3.316*** 3.028*** 2.561***

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+1) representing a firm’s

net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related

shareholder proposals. Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There

are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1

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80

Appendix J: Regression results robustness test 4 (ROS 2015)

ROS regression analysis 2015

Financial performance (ROS)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.010 (.071) -.008 (.071) -.003 (.071) .003 (.072)

Corp. governance SP .090 (1.288)

.090 (1.293)

.087 (1.287)

.084 (1.298)

Moderating variable

FIO -.120 (.086) -.149 (.096)*

Interactions

Executive compensation SP X FIO -.005 (.013)

Corp. governance SP X FIO .077 (.260)

Control variables

Firm size -.089 (.903) -.090 (.908) -.113 (.936) -.114 (.941) -.108 (.937) -.095 (.961)

Financial leverage .099 (.005) .099 (.005) .095 (005) .095 (.005) .093 (.005) .090 (.005)

Firm age -.067 (.015) -.067 (.015) .-072 (.015) -.072 (.015) -.069 (.015) -.063 (.015)

Natural resource-based industries .108 (4.064) .110 (4.088) .090 (4.075)* .091 (4.100) .085 (4.083)* .083 (4.153)*

Manufacturing industries .019 (3.882) .023 (3.918) -.012 (3.900) -.009 (3.938) -.017 (3.921) -.023 (3.981)

Service industries .038 (3.819) .042 (3.847) .015 (3.827) .017 (3.855) .004 (3.840) -.005 (3.896)

R square .032 .032 .039 .039 .054 .059

Adjusted R square -.001 -.007 .001 -.005 .004 -.003

F-statistic .960 .820 1.014 .884 1.078 .956

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROS (from t-1 to t+3) representing a firm’s

net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related shareholder proposals.

Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There are 240 observations. The

other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1

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Appendix K: Regression results robustness test 5 (ROS 2014)

ROS regression analysis 2014

Financial performance (ROS)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.081 (.105) -.083 (.106) -.085 (.106) -.089 (.107)

Corp. governance SP -.031 (1.596)

-.036 (1.597)

-.041 (1.603)

-.295 (4.540)

Moderating variable

FIO -.082 (.095) -.133 (.109)*

Interactions

Executive compensation SP X FIO .045 (.020)

Corp. governance SP X FIO .271 (.298)

Control variables

Firm size -.110 (1.043) -.122 (1.053)* -.104 (1.064) -.115 (1.071) -.115 (1.073) -.108 (1.081)

Financial leverage .068 (.006) .063 (.006) .069 (.006) .064 (.006) .068 (.006) .069 (.007)

Firm age -.142 (.017)** -.136 (.017)* .-142 (.017)** -.136 (.017)* -.132 (.018)* -.128 (.018)*

Natural resource-based industries .057 (4.817) .063 (4.815) .061 (4.834) .068 (4.832) .059 (4.845) .052 (4.855)

Manufacturing industries .134 (4.564) .150 (4.568) .145 (4.602) .164 (4.608) .145 (4.625) .129 (4.633)

Service industries .243 (4.501) .266 (4.512) .251 (4.523) .276 (4.534) .263 (4.545) .260 (4.548)

R square .063 .069 .064 .070 .077 .086

Adjusted R square .035 .036 .031 .033 .034 .034

F-statistic 2.228** 2.105** 1.930* 1.868* 1.810* 1.649*

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROS (from t-1 to t+3) representing a firm’s

net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive compensation-related shareholder proposals.

Corp. governance SP refers to filed corporate governance-related shareholder proposals. FIO refers to foreign institutional ownership. There are 240 observations.

The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***p≤0.01, **p≤0.05, *p≤0.1

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82

Appendix L: Regression results robustness test 6 (differentiation of proposal submitters 2015)

ROA regression analysis 2015 (using a differentiation in proposal submitters)

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4

Independent variable

Corp. governance SP .025 (.992) .025 (.982) .025 (.987)

Moderating variable

FIO -.156 (.059)** -.157 (.062)**

Interaction

Corp. governance SP X FIO .002 (.206)

Control variables

Firm size -.070 (.619) -.074 (.626) -.068 (.621) -.067 (.625)

Financial leverage .093 (.003) .094 (.003) .090 (.003) .090 (.003)

Firm age -.038 (.010) -.041 (.010) -.037 (.010) -.037 (.010)

Natural resource-based industries .028 (2.786) .024 (2.799) .016 (2.772) .016 (2.780)

Manufacturing industries .041 (2.661) .034 (2.677) .024 (2.651) .024 (2.659)

Service industries .066 (2.618) .062 (2.627) .045 (2.602) .045 (2.610)

R square .017 .018 .042 .042

Adjusted R square -.015 -.020 -.001 -.006

F-statistic .525 .463 .987 .872

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+3) representing

a firm’s net income divided by end of period total assets. Corp. governance SP refers to filed corporate governance-related shareholder proposals by

individuals. FIO refers to foreign institutional ownership. There are 240 observations. The other industries is the baseline industry for the dummy effects.

Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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83

CSP regression analysis 2015 (using a differentiation in proposal submitters)

Social performance (CSP)

Model 1 Model 2 Model 3 Model 4

Independent variables

Social SP -.035 (3.362) -.034 (3.372) -.036 (3.370)

Moderating variable

FIO .010 (.187) .042 (.201)

Interactions

Social SP X FIO -.090 (.567)

Control variables

Firm size -.192 (1.946)*** -.184 (2.000)** -.185 (2.007)** -.193 (2.014)**

Financial leverage .070 (.011) .071 (.011) .072 (.011) .067 (.011)

Firm age .107 (.033) .103 (.033) .103 (.033) .101 (.033)

Natural resource-based industries -.194 (8.764) -.185 (8.841) -.185 (8.866) -.185 (8.858)

Manufacturing industries -.216 (8.370) -.204 (8.434) -.204 (8.457) -.197 (8.452)

Service industries .-.227 (8.236) .-.221 (8.264) -.220 (8.290) -.220 (8.282)

R square .050 .051 .051 .058

Adjusted R square .020 .015 .010 .012

F-statistic 1.642 1.431 1.248 1.259

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the corporate social performance score of firms.

Social SP refers to filed social/environmental-related shareholder proposals by religious institutions. FIO refers to foreign institutional ownership. There are

240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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84

Appendix M: Regression results robustness test 7 (differentiation of proposal submitters 2014)

ROA regression analysis 2014 (using a differentiation in proposal submitters)

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4

Independent variable

Corp. governance SP .027 (1.191) .027 (1.194) .027 (1.196)

Moderating variable

FIO -.022 (.057) -.014 (.060)

Interaction

Corp. governance SP X FIO -.028 (.237)

Control variables

Firm size -.056 (.633) -.061 (.645) -.061 (.646) -.063 (.650)

Financial leverage .084 (.004) .083 (.004) .084 (.004) .079 (.004)

Firm age -.108 (.011) -.111 (.011) -.110 (.011) -.112 (.011)

Natural resource-based industries -.004 (2.923) -.006 (2.931) -.009 (2.942) -.011 (2.949)

Manufacturing industries .064 (2.769) .056 (2.787) .050 (2.801) .051 (2.807)

Service industries .143 (2.731) .137 (2.742) .134 (2.751) .133 (2.757)

R square .038 .039 .039 .040

Adjusted R square .010 .005 .001 -.003

F-statistic 1.336 1.161 1.024 .923

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+3) representing

a firm’s net income divided by end of period total assets. Corp. governance SP refers to filed corporate governance-related shareholder proposals by

individuals. FIO refers to foreign institutional ownership. There are 240 observations. The other industries is the baseline industry for the dummy effects.

Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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85

CSP regression analysis 2014 (using a differentiation in proposal submitters)

Social performance (CSP)

Model 1 Model 2 Model 3 Model 4

Independent variables

Social SP -.118 (3.752)* -.114 (3.750) -.109 (3.763)

Moderating variable

FIO .082 (.174) .059 (.187)

Interactions

Social SP X FIO .069 (.596)

Control variables

Firm size -.135 (1.940)* -.133 (1.932)* -.133 (1.929)* -.123 (1.953)*

Financial leverage .026 (.012) .025 (.012) .021 (.012) .021 (.012)

Firm age .102 (.032) .110 (.032) .106 (.032) .112 (.033)

Natural resource-based industries -.032 (8.957) -.035 (8.919) -.025 (8.921) -.056 (9.116)

Manufacturing industries .093 (8.487) .045 (8.516) .067 (8.533) .030 (8.664)

Service industries .-.132 (8.370) .-.193 (8.430) -.176 (8.432) -.211 (8.535)

R square .075 .088 .094 .098

Adjusted R square .048 .056 .058 .058

F-statistic 2.759** 2.777*** 2.621*** 2.423**

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the corporate social performance score of firms.

Social SP refers to filed social/environmental-related shareholder proposals by religious institutions. FIO refers to foreign institutional ownership. There

are 240 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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86

Appendix N: Regression results using a refined measure of shareholder activism (2015 shareholder vote %)

ROA regression analysis 2015 (using shareholder votes %)

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.253 (.089)* -.267 (.086)** -.253 (.088)* -.281 (.098)*

Corp. governance SP -.249 (.056)*

-.264 (.054)**

-.313 (.061)**

-.336 (.068)**

Moderating variable

FIO .073 (.156)** .102 (.175)

Interactions

Executive compensation SP X FIO .087 (.022)

Corp. governance SP X FIO -.025 (.010)

Control variables

Firm size -.233 (1.183) -.240 (1.152)* -.304 (1.202)** -.316 (1.162)** -.316 (1.208)** -.325 (1.270)**

Firm age -.090 (.017) -.046 (.017) -.108 (.017) -.062 (.016) -.067 (.017) -.069 (.017)

Natural resource-based industries -.158 (2.045) -.165 (1.990) -.151 (1.998) -.158 (1.932) -.152 (1.958) -.143 (2.007)

Service industries .166 (1.459) .196 (1.428) .207 (1.442) .242 (1.403)* .258 (1.438)* .279 (1.507)*

R square .142 .203 .197 .265 .279 .285

Adjusted R square .075 .124 .117 .175 .172 .142

F-statistic 2.112* 2.554** 2.456** 2.947** 2.598** 1.989*

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROA (from t-1 to t+3)

representing a firm’s net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed

executive compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related

shareholder proposals. FIO refers to foreign institutional ownership. There are 56 observations. The other industries is the baseline industry for the

dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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87

CSP regression analysis 2015 (using shareholder votes %)

Social performance (CSP)

Model 1 Model 2 Model 3 Model 4

Independent variables

Social SP .199 (.267) .231 (.274) .203 (.275)

Moderating variable

FIO -.177 (.622) -.161 (.620)

Interactions

Social SP X FIO .196 (.044)

Control variables

Firm size -.126 (6.652) -.098 (6.674) -.164 (7.366) -.235 (7.731)

Financial leverage .220 (.029) .255 (.029) .221 (.030) .222 (.029)

Firm age .060 (.075) .047 (.074) -.004 (.079) .022 (.079)

Natural resource-based industries .153 (6.844) .095 (7.051) .055 (7.274) .064 (7.235)

Service industries .-.002 (6.034) .-.023 (6.023) -.087 (6.521) -.053 (6.553)

R square .076 .110 .129 .161

Adjusted R square -.034 -.020 -.024 -.011

F-statistic 695 .847 .845 .936

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the corporate social performance score of firms.

Social SP refers to the percentage of votes in favor of filed social/environmental-related shareholder proposals. FIO refers to foreign institutional

ownership. There are 48 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses.

***

p≤0.01, **

p≤0.05, *p≤0.1

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88

Appendix O: Regression results using a refined measure of shareholder activism (2014 shareholder vote %)

ROA regression analysis 2014 (using shareholder votes %)

Financial performance (ROA)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.338 (.119)** -.354 (.122)** -.349 (.088)** -.279 (.098)**

Corp. governance SP -.024 (.075)

-.094 (.072)

-.082 (.061)

-.079 (.068)

Moderating variable

FIO -.053 (.156) -.093 (.175)

Interactions

Executive compensation SP X FIO -.018 (.022)

Corp. governance SP X FIO -.407 (.010)***

Control variables

Firm size -.084 (1.211) -.109 (1.149) -.092 (1.283) -.138 (1.219) -.146 (1.208) -.133 (1.270)

Firm age -.135 (.022) -.163 (.021) -.136 (.022) -.171 (.021) -.174 (.017) -.165 (.017)

Natural resource-based industries .111 (3.045) .130 (2.885) .111 (3.087) .130 (2.906) .127 (1.958) .201 (2.007)

Service industries .262 (1.743) .280 (1.651)* .257 (1.796) .261 (1.693)* .256 (1.438) .309 (1.507)*

R square .094 .207 .095 .214 .216 .365

Adjusted R square .014 .116 -.008 .104 .083 .218

F-statistic 1.170 2.292* .920 1.948* 1.617 2.487**

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROA (from t-1 to t+3)

representing a firm’s net income divided by end of period total assets. Executive compensation SP refers to the percentage of votes in favor for filed

executive compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related

shareholder proposals. FIO refers to foreign institutional ownership. There are 50 observations. The other industries is the baseline industry for the

dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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CSP regression analysis 2014 (using shareholder votes %)

Social performance (CSP)

Model 1 Model 2 Model 3 Model 4

Independent variables

Social SP -.147 (.338) -.120 (.339) -.097 (.352)

Moderating variable

FIO .195 (.582) .170 (.611)

Interactions

Social SP X FIO -.094 (.061)

Control variables

Firm size -.139 (7.746) -.113 (7.947) -.054 (8.238) -.075 (8.527)

Financial leverage .131 (.028) .164 (.029) .179 (.029) .145 (.031)

Firm age .182 (.080) .195 (.081) .192 (.081) .187 (.082)

Natural resource-based industries -.720 (19.804) -.593 (20.920) -.599 (20.833) -.618 (21.122)

Manufacturing industries -.801 (20.148) -.738 (20.512) -.683 (20.507) -.712 (20.854)

Service industries .-.801 (20.386)* .-.752 (20.710) -.733 (20.635) -.745 (20.900)

R square .130 .145 .178 .185

Adjusted R square -.024 -.037 -.028 -.052

F-statistic .843 .797 .863 .780

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the corporate social performance score of firms.

Social SP refers to the percentage of votes in favor of filed social/environmental-related shareholder proposals. FIO refers to foreign institutional

ownership. There are 41 observations. The other industries is the baseline industry for the dummy effects. Standard errors are in parentheses.

***

p≤0.01, **

p≤0.05, *p≤0.1

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Appendix P: Regression results using a refined measure of shareholder activism (ROS shareholder vote %)

ROS regression analysis 2015 (using shareholder vote %)

Financial performance (ROS)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.286 (.156)* -.300 (.149)** -.296 (.151)* -.312 (.166)*

Corp. governance SP -.306 (.106)**

-.319 (.102)**

-.336 (.109)**

-.367 (.116)**

Moderating variable

FIO .054 (.253) .171 (.298)

Interactions

Executive compensation SP X FIO .058 (.035)

Corp. governance SP X FIO -.184 (.022)

Control variables

Firm size -.244 (2.579) -.176 (2.572) -.304 (2.528)* -.236 (2.490) -.216 (2.701) -.163 (2.810)

Financial leverage .060 (.011) .022 (.011) .114 (011) .077 (.010) .075 (.010) .065 (.011)

Firm age -.209 (.029) -.149 (.029) .-178 (.028) -.114 (.028) -.113 (.028) -.080 (.029)

Natural resource-based industries .096 (3.206) .057 (3.138) .130 (3.101) .091 (3.003) .093 (3.045) .097 (3.083)

Service industries .121 (2.595) .188 (2.574) .178 (2.532) .250 (2.489) .260 (2.556) .324 (2.729)*

R square .173 .242 .255 .331 .333 .362

Adjusted R square .067 .122 .137 .204 .184 .174

F-statistic 1.630 2.012* 2.163* 2.612** 2.244** 1.926*

This table shows the results of the multiple linear regression analysis for 2015. The dependent variable is the % change in ROS (from t-1 to t+3)

representing a firm’s net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive

compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related

shareholder proposals. FIO refers to foreign institutional ownership. There are 45 observations. The other industries is the baseline industry for the

dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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91

Appendix Q: Regression results using a refined measure of shareholder activism (ROS shareholder vote %)

ROS regression analysis 2014 (using shareholder vote %)

Financial performance (ROS)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Independent variables

Executive compensation SP -.232 (.200) -.250 (.203)* -.252 (.203)* -.198 (.198)

Corp. governance SP -.093 (.112)

-.132 (.111)

-.170 (.114)

-.210 (.114)

Moderating variable

FIO .155 (.260) .247 (.319)

Interactions

Executive compensation SP X FIO .126 (.046)

Corp. governance SP X FIO -.299 (.016)*

Control variables

Firm size -.206 (2.355) -.211 (2.309) -.232 (2.471) -.247 (2.415) -.221 (2.454) -.168 (2.426)

Financial leverage .046 (.015) .067 (.015) .041 (.015) .061 (.015) .066 (.015) .091 (.015)

Firm age -.263 (.035) -.293 (.035)* .-268 (.036) -.302 (.035)* -.294 (.035)* -.263 (.035)

Natural resource-based industries .200 (4.565) .214 (4.484) .199 (4.605) .215 (4.502) .224 (4.513) .278 (4.408)*

Service industries .191 (2.772) .190 (2.718) .174 (2.838) .166 (2.771) .186 (2.795) .279 (2.886)

R square .170 .223 .178 .238 .258 .357

Adjusted R square .061 .097 .044 .090 .089 .162

F-statistic 1.556 1.769 1.331 1.605 1.522 1.834*

This table shows the results of the multiple linear regression analysis for 2014. The dependent variable is the % change in ROS (from t-1 to t+3)

representing a firm’s net income divided by net sales. Executive compensation SP refers to the percentage of votes in favor for filed executive

compensation-related shareholder proposals. Corp. governance SP refers to the percentage of votes in favor for corporate governance-related

shareholder proposals. FIO refers to foreign institutional ownership. There are 44 observations. The other industries is the baseline industry for the

dummy effects. Standard errors are in parentheses. ***

p≤0.01, **

p≤0.05, *p≤0.1

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