Shareholder activism impact on efficiency in Brazil

• Pages: 141-157
• DOI: https://doi.org/10.1108/CG-01-2018-0010
• Date: 13 September 2018
• Published date: 13 September 2018
• Author: Paula Guimaraes,Ricardo P.C. Leal,Peter Wanke,Matthew Morey
• Subject Matter: Corporate governance,Strategy

Shareholder activism impact on

eff‌iciency in Brazil

Paula Guimaraes, Ricardo P.C. Leal, Peter Wanke and Matthew Morey

Abstract

Purpose –This paper aimsto investigate the long-term impact of shareholderactivism on Brazilian listed

companies.

Design/methodology/approach –This study usesa sample of 194 companies in 2010, 2012 and 2014

and a two-stage data envelopment analysis to generate an efficiency score based on corporate

governance, ownership structure and financial characteristics of companies. In the second stage, the

study applies a bootstrap truncated regression to identify whether there is a relationship between the

efficiencyscores and a company-level activism index.

Findings –The resultsshow a negative correlation betweenthe efficiency scores and the activismindex,

suggesting that activist shareholders tend to target less efficient companies. A time analysis over the

period 2010-2014does not offer evidence ofimpacts of activism on changes of theefficiency scores.

Practical implications –Activist shareholders target less efficient companies. Shareholder activism

increasedafter regulation that facilitatedshareholder voting and required greatercompany transparency

was introduced.

Originality/value –The two-stage natureof the procedure used in the analysis ascertains that this result

is not spurious, assuringdata separability between productive resources andcontextual variables. This

study contributesto the scarce literature on activism in emergingmarkets.

Keywords Brazil, Shareholder activism, Eff‌iciency, Corporate governance, Data envelopment analysis

Paper type Research paper

Introduction

Shareholders have many ways to manifest their dissatisfaction. In most cases, they will

simply sell their shares and walk away. Some may prefer to engage management, perhaps

because selling their stake is not so easy or there is a potential gain from activism (Gillan

and Starks, 2000). Activist shareholders can request representation on the board of

directors (BOD); reject proposals presented for voting during general meetings; directly

negotiate with management; use the media to inform other shareholders about the current

situation of the company and needed improvements, among other actions (Gillan and

Starks, 2007). Activism is becoming an important corporate governance (CG) mechanism

and enables shareholders to bring about change, improve performance and create value

without a change in control (Gillan andStarks,2000, 2007;Renneboog and Szilagyi, 2011).

While research about shareholder activism is quite common in the USA and Europe, in Latin

America and particularly Brazil, there has been very little research conducted in this area

(Cris

ostomo and Gonza

´lez, 2006). A recent meta-analysis of articles dealing with CG and

performance in Latin America did not include a single article about activism (Maranho and

Leal, 2018). The reason for this may be the high ownership concentration that possibly

hinders shareholder activism (Judge et al.,2010;Punsuvo et al.,2007;Shleifer and Vishny,

1997). Recently, however, Brazilian ownership concentration has moderately decreased

with the emergence of hybrid ownership structures, and the creation of special stock

Paula Guimaraes is based

at the Federal University of

Rio de Janeiro, Rio de

Janeiro, Brazil.

Ricardo P.C. Leal is based

at the Coppead Graduate

School of Business, Federal

University of Rio de Janeiro,

Rio de Janeiro, Brazil.

Peter Wanke is based at

Federal University of Rio de

Janeiro, Rio de Janeiro,

Brazil. Matthew Morey is

based at the Lubin School

of Business, Pace

University, New York,

New York, USA.

Received 6 January 2018

Revised 3 April 2018

12 June 2018

2 August 2018

Accepted 6 August 2018

DOI 10.1108/CG-01-2018-0010 VOL. 19 NO. 1 2019, pp. 141-157, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 141

exchange listing segments that require companies to list only voting stock. In addition,

Vargas et al. (2018) and Cris

ostomo and Gonza

´lez (2006) have also found an increase in

active participation of institutional shareholders in the Braziliandomestic market.

The goal of this study, then, is to assess the types of firms that are targets of activism in

Brazil and the long-term impact of shareholder activism on such companies. To measure

shareholder activism in a firm,this paper uses a unique and novel activism index developed

by Vargas et al. (2018). It uses hand-collected data to calculate the level of shareholder

activism based on the minutes of company board meetings and activist activity in the media

and in Brazilian Securities Commission,or Comissa

˜o de Valores Mobilia

´rios (CVM) inquiries.

Specifically, the index ranges from 0 to 11 and is calculated for a 194 Brazilian firms in

years 2010, 2012 and 2014. There are more detailson the methodology inside the paper.

Next, to measure the efficiency of these firms, this paper uses a data envelopment analysis

(DEA) model to generate an efficiency score for each of the 194 firms for each of years,

2010, 2012 and 2014. This efficiency score is based on the CG structure of the companies

and some of its financial indicators, consisting, thus, of both types of major antecedents to

activism (Denes et al., 2017;Goranova and Ryan, 2014;Renneboog and Szilagyi,2011).

In the succeeding stage, a bootstrap truncated regression of the activism index on the

efficiency scores assesses whether activist shareholders tend to target less efficient

companies. Finally, the paper uses a non-parametric test to examine the relationship

between the levels of shareholder activism and improvements in efficiency of targeted

companies two and four years after the activistevent.

There are two main results. First, there is a negative contemporaneous correlation between

the efficiency scores and the activism index, suggesting that activist shareholders tend to

target less efficient companies. Second, we found that the level of activism did not

necessarily predict future increases in efficiency of the firm. For example, we find that firms

with higher levels of shareholder activism in 2010 did not produce greater increases in

efficiency in 2012 or 2014. This may be due to the fact that changes in efficiency of the firm

take longer to materialize. Hence, in sum, we find that activist shareholders target less

efficient firms, but the issue of whether they bring about improvements in corporate

efficiency remains open.

This paper is meaningful because it takes an important issue, the impact of shareholder

activism on the efficiency of the firm, and applies it to a large emerging market, which is a

type of market where little to no previous research on this topic has been conducted.

Indeed, as mentioned before, to the best of the authors’ knowledge, there are no

quantitative papers about emerging markets that have examined shareholder activism and

its impact on the efficiency of the firm. In this way, this investigation can demonstrate

whether there are differences between the results seen in an emerging market versus

developed markets. Moreover,the paper uses novel hand-collected data and employs DEA

methodologies that mitigate the well-known endogeneity problems that are common in CG

causality studies, as it uses a non-parametric form (Wintoki et al., 2012;Silveiraet al., 2010).

This is a notable departure from previous works in emerging markets, which may have been

affected by endogeneity (Punsuvo et al., 2007;Oliveira et al.,2012). This is important

because firm valuation derives mostly from the ability of its assets to add value through

operations (Alam and Sickles, 1998;Jensen and Meckling, 1976). Thus, if activist

shareholders are able to influence a company’s operations in emerging markets, then this

engagement may also add value (Denes et al.,2017).

Another reason this paper is meaningful is that the topic is directly related to recent

changes in Brazil’s financial system. These changes include the enactment of a major

disclosure regulation in 2010 that dramatically increased the quantity and quality of

mandatory company information disclosure and new regulations about proxy requests and

voting, as well as distance voting. With this paper, one can assess whether such changes

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