Clustered shareholder activism

• Author: Paul Calluzzo,Tanja Artiga González
• DOI: http://doi.org/10.1111/corg.12271
• Published date: 01 May 2019
• Date: 01 May 2019

ORIGINAL ARTICLE

Clustered shareholder activism

Tanja Artiga González

1

|Paul Calluzzo

2

1

School of Business and Economics, VU

University Amsterdam, Amsterdam, The

Netherlands

2

Smith School of Business, Queen's

University, Kingston, Ontario, Canada

Correspondence

Paul Calluzzo, Smith School of Business,

Queen's University, 143 Union Street,

Kingston, ON K7L 3N6, Canada.

Email: paul.calluzzo@queensu.ca

JEL Classification: G11; G14; G15; G32

Abstract

Research Question/Issue: This study examines activism campaigns where multiple

activists simultaneously target the same firm—which we term clustered shareholder

activism. Despite the growing influence of shareholder activism on corporate gover-

nance, the clustered activism phenomenon has previously only been addressed

indirectly, anecdotally, or with limited data. We consider cost sharing motives for

clustered activism and whether the phenomenon exerts a positive or negative impact

on the performance of the target firm.

Research Findings/Insights: Using a large dataset of shareholder activism events at

U.S. firms, we find that clustered activism campaigns are more common at larger firms

and among geographically proximate activists, which is consistent with our prediction

that activists cluster to reduce the costs associated with activism campaigns. Further-

more, we find that clustered activism produces elevated profitability and abnormal

returns, which is consistent with our prediction that activists cluster to address

principal–agency costs.

Theoretical/Academic Implications: Our study provides some of the first theoretical

and empirical evidence on the clustered activism phenomenon. We contribute to the

understanding of the role of shareholder activism by considering their effect on

principal–agency and principal–principal problems. Our results also contribute to the liter-

ature that examines factors relating to the success of shareholder activism by documenting

the effect of clustered activism on activism costs and target firm performance.

Practitioner/Policy Implications: Our study adds to the debate among practitioners

and regulators on the merits (or lackthereof) of clustered activism. Our findings suggest

that a regulatory approach that encourages clusteredactivism can benefit shareholders.

Video Abstract: https://onlinelibrary.wiley.com/page/journal/14678683/homepage/

videoabstracts.html

youtube: https://www.youtube.com/watch?time_continue=1&v=0_D-6Pw9sYo

KEYWORDS

Corporategovernance, geography,international investment,large blockholder,shareholder activism

1|INTRODUCTION

In August 2013, a shareholder activist, Third Point LLC, announced a

9.6% stake in Sotheby's. Third Point asked Sotheby's CEO and chair-

man, William F. Ruprecht, to step down and pressed for board seat

representation. Their announcement came 1 month after another

activist, Marcato Capital Management, reported a 6.6% activist stake

in the firm, and a third activist, Trian Partners, also held a smaller stake

in the firm. Third Point acknowledged the presence of these other

activists and their intentions to work with them, stating in mandatory

SEC filings that they “may engage in a dialogue and other communica-

tions regarding the Issuer with other stockholders of the Issuer,”and

Received: 18 August 2017 Revised: 11 October 2018 Accepted: 30 November 2018

DOI: 10.1111/corg.12271

210 © 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2019;27:210–225.wileyonlinelibrary.com/journal/corg

that they “support the Company placing a designee from another large

shareholder on the Board.”These actions coincide with anecdotal evi-

dence that suggests shareholder activists are increasingly targeting

firms en masse and recent SEC reforms aimed at reducing friction to

communication among shareholders (SEC, 2008).

Sotheby's responded to the building shareholder pressure by insti-

tuting a poison pill with a 10% threshold. However, the activists were

nevertheless able to accumulate a 19% ownership stake in Sotheby's

stock—a level that gave them effective veto power over major corpo-

rate decisions without triggering the poison pill—because the stake

was split among these three different activists, none of whom

exceeded the 10% ownership threshold. Eventually, Third Point nego-

tiated an agreement with Sotheby's management in which their

demand to place three directors on the firm's board was met.

1

Shleifer and Vishny (1986) highlight the ability of shareholder activ-

ists, such asThird Point, to mitigate the agency costs associated with the

separation of firm ownership and management through merger threats,

proxy fights, and internal management shake‐ups. However, it is not

clear that this framework applies to instances where, as at Sotheby's,

multiple activists target the same firm, and this phenomenon necessi-

tates a reexamination of the role activists play at the firm. We define

“clustered (SC‐13D) shareholder activism”as an instance where two

or more activists file separate Schedule 13‐D ownership reports to the

SEC within 6 months of each other.

2

Despite the rich anecdotal evi-

dence of multiple activists targeting the same firm and their potential

to affect firm value, there has been little research that empirically

addresses the clustered activism phenomenon. Our paper seeks to fill

this void by examining the motives and outcomes of clustered activism.

We consider that cost sharing motives may drive clustered activ-

ism. Sotheby's had a stock market capitalization of approximately $3

billion at the time of the activism campaign. Therefore, acquiring a

19% ownership stake, which the three activists accumulated, would

have cost $570 million. After acquiring their ownership stake, activists

must also bear the cost of waging an activism campaign, which has been

shown to erode almost all of their returns (Gantchev, 2013). We also

consider the role geography plays in clustered activists. Two of the

three activists who targeted Sotheby's—Third Point and Trian Part-

ners—as well as Sotheby's itself, are located within walking distance

of each other in Manhattan, and research suggests that geographic

proximity is important in establishing trust and in exchanging informa-

tion (Hong, Kubik, & Stein, 2005; Leamer & Storper, 2001).

The theoretical framework proposed by Jensen and Meckling

(1976) and Shleifer and Vishny (1986) shows that the presence of

the activists' large ownership block (as well the three directors they

appointed) can mitigate principal‐agent (PA) problems and improve

firm value. In line with this prediction, in August 2013, around the

announcement of Third Point's activism stake, Sotheby's stock

outperformed the S&P 500 by 7.6%. However, over the following

year, Sotheby's stock unperformed the S&P 500 by 24.3% and its

operating performance stagnated, calling into question whether the

clustered activism campaign had in fact improved Sotheby's value.

The belief that activists improve firm value is based on the potentially

flawed assumption that shareholder interests at the firm are homoge-

nous and the activist is acting to pursue those interests. We follow the

recommendation of Goranova, Abouk, Nystrom, and Soofi (2017) and

consider a more complex shareholder activism environment that

includes potential principal–principal (PP) costs that arise when share-

holder interests are heterogeneous and activists attempt to extract

private benefits at the expense of other shareholders. If clustered

activism campaigns create PP costs, they may harm shareholder value.

We empirically examine the motives and outcomes of shareholder

activism using a manually collected dataset of Schedule‐13D (SC‐13D)

filings that spans from 2000 to 2011 and contains 2,435 unique share-

holder activists. We find that clustered activists tend to target larger

firms where activism campaigns are costlier, which is consistent with

cost sharing motives for clustered activism. Furthermore, we find that,

compared with internationally based activists, U.S.‐based activists are

more likely to cluster together, as are activists who are geographically

proximate. This result is consistent with our prediction that the costs

to pursue activism will be lower in these settings.

Lastly, we examine the outcomes of clustered activism. We find

that announcements of clustered activism generate significantly posi-

tive cumulative abnormal returns (CAR) for the target firm: The first

activist generates a CAR of 5.0% in the 41 days (t=−10, t= +30) sur-

rounding their SC‐13D filing, whereas the second activist, which pro-

duces the cluster, generates a CAR of 9.5% over this window. Thus, at

firms that experience a clustered campaign, there is a cumulative

effect where the non‐activist shareholders of the firm reap the bene-

fits of both the first and subsequent activists. We find similar results

when we examine the effects of clustered activism on the accounting

performance of the firm. Firms targeted by both single and clustered

activists become more profitable. Taken together, these results

suggest that lead and follower activists are successfully working

towards the common goal of improving firm value and are consistent

with clustered activism addressing PA costs at the target firm.

Overall, our paper contributes to a better global understanding of

the role of shareholder activism in corporate governance. We provide

some of the first theoretical and empirical evidence on the clustered

activism phenomenon. We contribute to the understanding of the role

of shareholder activism in corporate governance by considering that

activists and smaller shareholders may have either homogenous or het-

erogeneous interests and may affect PA and PP problems at the firm.

Our results also contribute to the literature examining factors relating

to the success of shareholder activism by documenting the effect of

clustered activism on activism costs and target firm performance.

The remainder of this paper is organized as follows. The next

section reviews the literature and develops our hypotheses. The data

section summarizes the data collection process and provides descrip-

tive statistics of the sample. In the results section, we present the main

results of the paper, including regression analyses that examine the

motives and outcomes of clustered activism. Finally, in the last section

of the paper, we give a critical discussion of our results and conclusion

and present a path for future research.

2|LITERATURE REVIEW AND HYPOTHESES

DEVELOPMENT

Jensen and Meckling (1976) develop a theoretical model that demon-

strates how PA problems arise at the firm when ownership and

ARTIGA GONZÁLEZ AND CALLUZZO 211