UBC Theses and Dissertations

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UBC Theses and Dissertations

Antigreenmail charter amendments and shareholders’ wealth Yeo, Boon Hong 1986

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ANTIGREENMAIL CHARTER AMENDMENTS AND SHAREHOLDERS' WEALTH by BOON HONG YEO A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE (BUSINESS ADMINISTRATION) in THE FACULTY OF GRADUATE STUDIES Commerce and Business A d m i n i s t r a t i o n We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA September 1986 © Boon Hong Yeo, 1986 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the The U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and study. I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s or her r e p r e s e n t a t i v e s . I t i s understood that copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l gain s h a l l not be allowed without my w r i t t e n p e r m i s s i o n . Commerce and Business A d m i n i s t r a t i o n The U n i v e r s i t y of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 Date: September 1986 A b s t r a c t From time to time, firms do repurchase t h e i r shares. An open market repurchase or a general tender o f f e r does not have the e f f e c t of t r a n s f e r i n g wealth from one group of sh a r e h o l d e r s to another. T h i s i s i n c o n t r a s t to a p r i v a t e l y n e g o t i a t e d premium repurchase from a s i n g l e block holder where the remaining shareholders are excluded from p a r t i c i p a t i n g i n the o f f e r . T h i s type of t a r g e t e d share repurchasing has been observed before - or i n connection with - a takeover attempt and o f t e n has the e f f e c t of t e r m i n a t i n g the takeover attempt. Such a t a r g e t e d share repurchase i s commonly r e f e r r e d to as "greenmail". The p r i c e i s u s u a l l y at a premium over the p r e v a i l i n g market p r i c e and the s e l l e r w i l l t y p i c a l l y agree to a b s t a i n from a c q u i r i n g any more of the company's v o t i n g stock. The n o n - p a r t i c i p a t i n g shareholders stand to l o s e from both the premium p a i d out of c o r p o r a t e a s s e t s and the l o s s of a p o t e n t i a l takeover o f f e r premium. Recently, f i r m s have been proposing to i n s t i t u t e a n t i g r e e n m a i l c h a r t e r amendments that would prevent management from engaging i n greenmail. Such a p r o p o s a l may or may not be i n the best i n t e r e s t of s h a r e h o l d e r s . T h i s paper attempts to measure the economic s i g n i f i c a n c e of an a n t i g r e e n m a i l p r o p o s a l . The methodology chosen i s that of an event-time study. The magnitude of abnormal r e t u r n s i s used to gauge i t s s i g n i f i c a n c e i n r e l a t i o n to the day that the market l e a r n s i i of the a n t i g r e e n m a i l c h a r t e r amendment. The "stockholder i n t e r e s t h y p o t h e s i s " p r e d i c t s that the p r o p o s a l i s undertaken with the i n t e r e s t of shareholders i n mind and thus stock p r i c e s should r e a c t p o s i t i v e l y to the announcement. However, the r e s u l t s obtained do not support that h y p o t h e s i s . Stockholders seem to s u f f e r a s t a t i s t i c a l l y s i g n i f i c a n t d e c l i n e i n the value of t h e i r shares around the day when news of such p r o p o s a l s reach the market. T h i s r e s u l t i s a l s o i n c o n s i s t e n t with p r e v i o u s e m p i r i c a l evidence on t a r g e t e d repurchases and s t a n d s t i l l agreements. Table of Contents A b s t r a c t i i L i s t of Tables v i L i s t of F i g u r e s v i i Acknowledgements v i i i 1. I n t r o d u c t i o n and Summary 1 2. L i t e r a t u r e Review 7 2.1 C o s t l y c o n t r a c t i n g , agency problem and c o r p o r a t e c o n t r o l 7 2.2 S t u d i e s i n t o takeovers 9 2.2.1 Mergers 9 2.2.2 Tender o f f e r s 10 2.2.3 Remarks 11 2.3 Targeted repurchases and s t a n d s t i l l agreements ..12 2.3.1 Corporate r a i d i n g and n o n - p a r t i c i p a t i n g shareholders 13 2.3.2 Remarks 15 3. Corporate c o n t r o l and greenmail 17 3.1 The case f o r greenmail 17 3.1.1 The evidence 18 4. A n t i g r e e n m a i l c h a r t e r amendments 19 4.1 Stockholder i n t e r e s t h y p othesis 20 5. Data Sources and Methodology 23 5. 1 The Data 23 5.2 The Methodology 25 6. E m p i r i c a l R e s u l t s 31 6.1 V a r y i n g d e f i n i t i o n s of abnormal r e t u r n s 31 6.1.1 Method 1 r e s u l t s 32 6.1.2 Method 2 r e s u l t s 35 i v 6.1.3 Method 3 r e s u l t s 36 6.1.4 Method 4 r e s u l t s 36 6.2 Summary of the r e s u l t s 37 6.3 M u l t i p l e amendment p r o p o s a l s 39 6.3.1 R e s u l t s f o r the reduced sample 40 6.4 I n t e r p r e t a t i o n of r e s u l t s 45 6.4.1 The c o n f o u n d i n g e f f e c t s 48 6.5 Changing event day 0 50 6.6 V o t i n g f o r a n t i g r e e n m a i l amendments 52 6.6.1 F i r m c h a r a c t e r i s t i c s 53 6.6.2 Takeovers w i t h i n i n d u s t r i e s 55 7. C o n c l u s i o n s 57 APPENDIX 1 59 APPENDIX 1A 60 APPENDIX 2 61 APPENDIX 3 62 APPENDIX 4 63 APPENDIX 5 64 APPENDIX 6 65 APPENDIX 7 .66 BIBLIOGRAPHY ....67 v L i s t of- Tables 1. Frequency d i s t r i b u t i o n of proxy statement mail date by month 26 2. Abnormal r e t u r n s and cumulative . abnormal r e t u r n s f o r Method 1 33 3. Comparative s t a t i s t i c s f o r 31 firms using 4 methods of d e r i v i n g abnormal r e t u r n 38 4. Abnormal r e t u r n s and cumulative abnormal r e t u r n s f o r 10 firms using Method 1 41 5. Abnormal r e t u r n s and cumulative abnormal r e t u r n s f o r 10 firms using Method 3 42 6. Comparative s t a t i s t i c s f o r the 10 firms 46 7. Comparative s t a t i s t i c s f o r 21 firms that proposed both a n t i g r e e n m a i l and a n t i t a k e o v e r amendments 49 8. Comparative s t a t i s t i c s f o r 7 firms when event day 0 i s the f i r s t a v a i l a b l e news date i n the WSJI 51 9. C a t e g o r i z a t i o n of the sample f i r m s i n t o the f i r s t two d i g i t s of the SIC code together with the frequency of takeovers experienced w i t h i n the category 56 v i L i s t of F i g u r e s 1 . P l o t of CAAR from T a b l e 2 34 2. P l o t of CAAR from T a b l e 4 43 3. P l o t of CAAR from T a b l e 5 44 v i i Ac knowledqement s I am indebted to the chairman Espen Eckbo f o r h i s constant guidance and for suggesting the t o p i c . I would a l s o l i k e to thank Ron Giammarino f o r h i s comments and encouragement. H e l p f u l comments were r e c e i v e d from Anthony Boardman and Rex Thompson. Any e r r o r s are the s o l e r e s p o n s i b i l i t y of the author. v i i i 1. INTRODUCTION AND SUMMARY Unimpeded co m p e t i t i v e f o r c e s i n the market f o r co r p o r a t e c o n t r o l and the market f o r managerial labour s e r v i c e s help ensure that incumbent management does not d e v i a t e e x t e n s i v e l y from t h e i r presumed mandate of maximizing shareholders' wealth. In the absence of such market enforcement, management has c o n s i d e r a b l y more l a t i t u d e in r a i s i n g p e r q u i s i t e consumption and p o s s i b l y d e v i a t i n g f u r t h e r from value maximizing behaviour. One of the more e f f e c t i v e ways of d i s c i p l i n i n g management i s the t h r e a t of displacement through the shareholders' vote. The stockholder vote can operate i n s e v e r a l ways. A st o c k h o l d e r d e t e c t i n g i n e f f i c i e n c y might s o l i c i t the votes of other s t o c k h o l d e r s i n an attempt to r e p l a c e management. Yet another way i s f o r an i n v e s t o r to buy enough shares i n the company and s e i z e c o n t r o l of the f i r m . Faced with the t h r e a t of being r e p l a c e d , t a r g e t management sometimes responds with d e f e n s i v e t a c t i c s that are intended to make the f i r m l e s s a t t r a c t i v e or more d i f f i c u l t to a c q u i r e . T h i s c o u l d be motivated i n pa r t by the p o t e n t i a l p e r s o n a l cost to the managers themselves i f a takeover t h r e a t i s s u c c e s s f u l or they c o u l d be motivated by shareholder i n t e r e s t . These d e f e n s i v e t a c t i c s may be looked at as two separate c a t e g o r i e s ; those that do not r e q u i r e s h a r e h o l d e r s ' approval and those that do. The so c a l l e d r e v erse bear hug, scorched e a r t h , show stopper, and poison p i l l s are a few 1 2 examples of defenses that can be r e s o r t e d to i n response to a takeover attempt. These do not r e q u i r e p r i o r c o n s u l t a t i o n with the s h a r e h o l d e r s 1 . Firms can a l s o amend t h e i r c h a r t e r s to c o n t a i n a n t i t a k e o v e r laws. These must be approved by shareholders before becoming e f f e c t i v e . For example, a c l a s s i f i e d board of d i r e c t o r s and supermajority p r o v i s i o n s are two defense manoeuvres that can make a complete takeover more time consuming, c o s t l y and d i f f i c u l t 2 . S t r a t e g i e s that make an a c q u i s i t i o n more d i f f i c u l t and c o s t l y c o u l d t h e r e f o r e discourage a p o t e n t i a l a c q u i r e r from t a k i n g over the f i r m . Thus, r e g a r d l e s s of the need f o r shareholders' a p p r o v a l , the dominant e f f e c t i s to convey the message that incumbent management i s u n w i l l i n g to concede c o n t r o l of the f i r m at the p r o f f e r e d p r i c e 3 . Before i n i t i a t i n g a takeover b i d , the p o t e n t i a l a c q u i r e r u s u a l l y owns a small percentage of the t a r g e t f i r m a l r e a d y . T h i s s i t u a t i o n presents yet another d e f e n s i v e t a c t i c t h a t management can c a l l upon to fend o f f the s u i t o r . Target management can repurchase the shares h e l d by the bi d d e r . In order to e n t i c e the bidder i n t o a c c e p t i n g t a r g e t management's o f f e r , the p r i c e i n the repurchase i s u s u a l l y g r e a t e r than the p r e v a i l i n g market p r i c e . In exchange f o r the premium p r i c e , the bidder w i l l t y p i c a l l y agree to 1 See G i l s o n R (82) and M a l a t e s t a P (85). 2 See Linn and McConnell (83) f o r a d i s c u s s i o n of the types of a n t i t a k e o v e r defenses. 3 The i s s u e of whether management i s doing t h i s i n the i n t e r e s t of s t o c k h o l d e r s w i l l be d e f e r r e d to a l a t e r s e c t i o n . 3 a b s t a i n from any f u t u r e attempts at t a k i n g over the f i r m w i t h i n some s t i p u l a t e d time p e r i o d . The w i l l i n g n e s s of the bidder to accept management's o f f e r and to enter i n t o a s t a n d s t i l l agreement p r o v i d e s t a r g e t management with a defence. T h i s repurchase has been dubbed greenmail. The payment of greenmail e s s e n t i a l l y terminates a takeover t h r e a t . I t may be c a l l e d a block repurchase from a s i n g l e shareholder in c o n j u n c t i o n with a s t a n d s t i l l agreement as i n the study by Bradley and Wakeman (83). Ne v e r t h e l e s s , the e f f e c t i s i d e n t i c a l . Managerial o p p o s i t i o n that excludes c o m p e t i t i o n , such as greenmail and s t a n d s t i l l agreements, i s l i k e l y to be harmful to s h a r e h o l d e r s . To the extent that the t a r g e t f i r m succeeds i n gree n m a i l i n g a p o t e n t i a l a c q u i r e r , i t a l s o i n e v i t a b l y prevents t a r g e t shareholders from r e c e i v i n g a premium f o r t h e i r shares by e l i m i n a t i n g the tender o f f e r . In a d d i t i o n , greenmail a l s o has the e f f e c t of i n s u l a t i n g t a r g e t management from a major mechanism by which they may be u n w i l l i n g l y d i s p l a c e d . Thus, f a i l u r e to r e s i s t a takeover attempt may cost managers t h e i r jobs and s u c c e s s f u l l y thwarting a takeover can be c o s t l y to t a r g e t s h a r e h o l d e r s , e s p e c i a l l y when a s u b s t a n t i a l premium has been o f f e r e d . P a r a d o x i c a l l y , management sometimes may propose that the d i s c r e t i o n a r y use of greenmail be made i l l e g a l under the c o r p o r a t e c h a r t e r . An a n t i g r e e n m a i l c h a r t e r amendment 4 p r o h i b i t s management from paying greenmail without f i r s t having the m a j o r i t y of s h a r e h o l d e r s ' a p p r o v a l . T h i s a c t i o n by management does not seem to be s e l f - s e r v i n g and may be c o n s i s t e n t with an a p p r o p r i a t e l y m o d i f i e d s t o c k h o l d e r i n t e r e s t h y p o t h e s i s . B r i e f l y , the s t o c k h o l d e r i n t e r e s t hypothesis p r e d i c t s that the dominant e f f e c t of an a n t i g r e e n m a i l c h a r t e r amendment i s to b e n e f i t s h a r e h o l d e r s . The o b j e c t i v e of t h i s paper i s to t e s t that h y p o t h e s i s . Between September 1984 and September 1985, 48 companies in the U n i t e d S t a t e s were i d e n t i f i e d as having proposed a n t i g r e e n m a i l c h a r t e r amendments. With the e x c e p t i o n of I n f o r m a t i c s General C o r p o r a t i o n , a l l the firms passed the amendments". Some of these firms a l s o proposed other amendments i n the same proxy statement. For the f i n a l sample of 31 f i r m s , an event study methodology i s used to analyze the abnormal r e t u r n s . From t h i s i n i t i a l sample, we then excluded those firms that proposed a n t i t a k e o v e r amendments in the same proxy statement. The abnormal r e t u r n s are d e f i n e d as the a c t u a l r e a l i z e d r e t u r n l e s s the f i r m ' s expected r e t u r n as i m p l i e d by any one of the four methods chosen f o r d e r i v i n g a f i r m ' s expected r e t u r n . The r e s u l t s are not p a r t i c u l a r l y s e n s i t i v e to the c h o i c e of methods. On average, the 31 firms experienced wealth decreases over the p e r i o d 30 days before through 30 days a f t e r the proxy statement c o n t a i n i n g the amendments 0 A l i s t of the companies i s i n Appendix 1. 5 were mailed to the shareh o l d e r s . When using the market model 5 , the s t a t i s t i c a l l y s i g n i f i c a n t l o s s e s o c c u r r e d over the p e r i o d 10 days before through the day a f t e r the m a i l i n g date (12 day per i o d ) and the p e r i o d a day before through the day a f t e r the m a i l i n g date (3 day p e r i o d ) . The average st o c k h o l d e r l o s t between 2.3% and 2.5% over the 12 day i n t e r v a l 6 . Over the 3 day p e r i o d , the market model using an equal weighted market index and the market adju s t e d model produced s t a t i s t i c a l l y s i g n i f i c a n t l o s s e s of 1% and 1.1%. The other two models a l s o produced negative abnormal r e t u r n s but they were not s t a t i s t i c a l l y s i g n i f i c a n t . The sample was then reduced to firms that d i d not propose other a n t i t a k e o v e r amendments with the a n t i g r e e n m a i l p r o p o s a l . The procedure of determining abnormal r e t u r n s was r e p l i c a t e d f o r the sample of 10 fi r m s that met t h i s more r e s t r i c t i v e c r i t e r i a . S t a t i s t i c a l l y s i g n i f i c a n t l o s s e s were found f o r 2 day, 3 day and 12 day event p e r i o d s . The market model produced negative r e t u r n s of 2% (t=-2.55), 3.3% (t=-3.57) and 3.7% (t=-2.05) f o r the 2 day, 3 day and 12 day event p e r i o d s . The market a d j u s t e d model a l s o had s t a t i s t i c a l l y s i g n i f i c a n t l o s s e s of 1.8% f o r the 2 day p e r i o d and 3% f o r the 3 day p e r i o d . The 12 day p e r i o d l o s s of 3.1% i s however not s i g n i f i c a n t l y d i f f e r e n t from zero . 5 Two s e t s of c a l c u l a t i o n s were made with the market model. One uses an equal weighted market index and the other uses a value weighted market index. 6 The r e t u r n s are not a n n u a l i z e d . 6 F o r l o n g e r e v e n t p e r i o d s , t h e s t a t i s t i c s f o r b o t h s a m p l e s i z e s y i e l d e d s i m i l a r r e s u l t s . S h a r e h o l d e r s i n c u r r e d n e g a t i v e r e t u r n s b u t t h e y w e r e n o t s t a t i s t i c a l l y s i g n i f i c a n t . A s a n a l t e r n a t i v e , i n s t e a d o f a n a l y z i n g t h e a b n o r m a l r e t u r n s a r o u n d t h e d a t e t h a t t h e p r o x y w a s m a i l e d , t h e a n a l y s i s w a s f o c u s e d a r o u n d t h e d a t e t h a t t h e W a l l S t r e e t J o u r n a l f i r s t n o t e d t h e a n t i g r e e n m a i l p r o p o s a l , w h i c h w a s t y p i c a l l y l a t e r t h a n t h e p r o x y m a i l i n g d a t e . T h e r e s u l t s w e r e a l l s t a t i s t i c a l l y i n s i g n i f i c a n t . M a r k e t p a r t i c i p a n t s s e e m t o r e c e i v e n e w s o f t h e a n t i g r e e n m a i l p r o p o s a l w h e n t h e f i r m s e n d s o u t t h e p r o x y s t a t e m e n t r a t h e r t h a n w h e n i t i s l a t e r r e p o r t e d i n t h e f i n a n c i a l p r e s s . T h e r e s u l t s i n d i c a t e t h a t t h e m a r k e t r e a c t e d u n f a v o u r a b l y t o f i r m s p r o p o s i n g a n t i g r e e n m a i l a m e n d m e n t s a n d d o n o t s u p p o r t t h e h y p o t h e s i s t h a t s u c h p r o p o s a l s a r e i n t h e s h a r e h o l d e r s b e s t i n t e r e s t s . T h i s i s i n c o n s i s t e n t w i t h t h e a v a i l a b l e e v i d e n c e o n t a r g e t e d r e p u r c h a s e s a n d s t a n d s t i l l a g r e e m e n t s w h i c h i n d i c a t e t h a t t h e s e a c t i o n s a r e d e t r i m e n t a l t o t h e w e l f a r e o f t h e n o n - p a r t i c i p a t i n g s h a r e h o l d e r s . A n a d e q u a t e e x p l a n a t i o n f o r w h y s t o c k h o l d e r s w o u l d v o t e i n f a v o u r o f a c h a r t e r a m e n d m e n t i s u n a v a i l a b l e . I n s u m , t h e e v i d e n c e p r e s e n t e d i n t h i s p a p e r r e p r e s e n t s a n e m p i r i c a l a n o m a l y a n d i t p r e s e n t s a n i m p o r t a n t t o p i c f o r f u t u r e r e s e a r c h . 2. LITERATURE REVIEW 2.1 COSTLY CONTRACTING, AGENCY PROBLEM AND CORPORATE CONTROL As owners, shareholders appoint a board of d i r e c t o r s who have the r e s p o n s i b i l i t y of f o r m u l a t i n g a set of o b j e c t i v e s for the f i r m . The board of d i r e c t o r s , in turn a p p o i n t s a management team who w i l l d e v i s e a p p r o p r i a t e s t r a t e g i e s i n order to meet those o b j e c t i v e s . The presumed mandate of management i s the maximization of i t s shareholders* wealth. Shareholders seldom have a d i r e c t say i n how c o r p o r a t e resources are spent. Most managers are merely a c t i n g i n the c a p a c i t y of agents f o r the s h a r e h o l d e r s 7 . Management may thus d e v i a t e from value maximizing a c t i o n s without being s e v e r e l y a f f e c t e d . Recognizing t h i s problem, shareholders may impose r e s t r i c t i o n s on management by way of a l e g a l c o n t r a c t . When c o n t r a c t i n g i s c o s t l e s s , managers and s t o c k h o l d e r s w i l l be able to r e s o l v e a l l d i f f e r e n c e s and ensure that management adheres to a p o l i c y of wealth maximization. However, c o n t r a c t i n g i s not c o s t l e s s . There are the l e g a l fees when drawing up a c o n t r a c t and there are a l s o c o s t s i n v o l v e d i n v e r i f y i n g that the c o n t r a c t i s not breached. In a d d i t i o n , there i s the d i f f i c u l t y of p o l i c i n g management c o n s t a n t l y . Hence, the p o s s i b i l i t y of a management-stockholder c o n f l i c t of i n t e r e s t r e m a i n s 8 . 7 Some managers may a l s o be s h a r e h o l d e r s and most are i n v o l v e d i n some form of stock o p t i o n p l a n . 8 See Jensen and Meckling (1976), "Theory of the f i r m : Managerial behaviour, agency c o s t s and owner s t r u c t u r e . " 7 8 As long as management i s i n c o n t r o l of corpora t e a s s e t s , i t has an i n c e n t i v e to r a i s e i t s p e r q u i s i t e consumption e s p e c i a l l y i f i t s behaviour i s not c o n s t r a i n e d by a r e s t r i c t i v e c o n t r a c t . 4ut c o n t r o l over c o r p o r a t e resources may be t r a n s f e r r e d i n a s u c c e s s f u l takeover when the s u c c e s s f u l bidder i n s t a l l s a new management team. Thus a p o t e n t i a l welfare cost f a c i n g t a r g e t management i s the l o s s of employment. Therefore an important c o n s t r a i n t which prevents management from d e v i a t i n g e x c e s s i v e l y from value maximization i s the t h r e a t of being taken over. In the context of co r p o r a t e c o n t r o l , the managerial entrenchment hypothesis s t a t e s that management o p p o r t u n i s t i c a l l y takes measures that reduce the t h r e a t of t a k e o v e r s 9 . T h i s presents management with the o p p o r t u n i t y to r a i s e p e r q u i s i t e consumption at sha r e h o l d e r s ' expense without being h a r s h l y d i s c i p l i n e d . The remainder of t h i s s e c t i o n w i l l review s t u d i e s that g e n e r a l l y address the q u e s t i o n s , i ) Are takeovers economically b e n e f i c i a l to t a r g e t s h a r e h o l d e r s ? i i ) Are c e r t a i n u n i l a t e r a l d e c i s i o n s made by management d e t r i m e n t a l to the n o n - p a r t i c i p a t i n g shareholder ? 8 ( c o n t ' d ) J o u r n a l of F i n a n c i a l Economics V o l . 3. 9 Williamson 0 (1975), "Markets and h i e r a c h i e s : A n a l y s i s and a n t i t r u s t i m p l i c a t i o n s " The Free Press, New York. 9 2.2 STUDIES INTO TAKEOVERS There i s no attempt here to d i s c u s s the m o t i v a t i n g f a c t o r ( s ) behind an a c q u i r e r ' s d e c i s i o n to take over another f i r m 1 0 . Of course not a l l takeover attempts are s u c c e s s f u l . Some are withdrawn by the bidders while others may be r e p e l l e d by t a r g e t management. There are b a s i c a l l y 2 ways to t a k i n g over a f i r m 1 1 . In a merger, the bidder approaches t a r g e t management with a ne g o t i a b l e p r o p o s a l . T h i s i s u s u a l l y termed a f r i e n d l y takeover. When an a c q u i r e r appeals d i r e c t l y to the t a r g e t shareholders i n a tender o f f e r , thereby bypassing management, i t i s u s u a l l y c o n s i d e r e d a h o s t i l e b i d d e r . The wealth e f f e c t on share h o l d e r s i n mergers and tender o f f e r s w i l l be d i s c u s s e d s e p a r a t e l y . 2.2.1 MERGERS For s u c c e s s f u l mergers, the g a i n 1 2 to t a r g e t s h a r e h o l d e r s over the 2 day p e r i o d of the announcement of a merger o f f e r and the day before, i s s t a t i s t i c a l l y s i g n i f i c a n t . Dodd (80) and A s q u i t h (83) found that t a r g e t s h a r e h o l d e r s gained 13.4% and 6.2% r e s p e c t i v e l y over the 2 day p e r i o d . Eckbo (83) examined the e f f e c t s over a 3 day p e r i o d (the announcement of a merger o f f e r , the day before and the day a f t e r ) . He a l s o concluded that t a r g e t 1 0 See Eckbo (83) f o r a d i s c u s s i o n of the sources of takeover g a i n s . 1 1 The other way i s through a proxy c o n t e s t . T h i s w i l l not be d i s c u s s e d . 1 2 Any gain or r e t u r n r e f e r r e d to means the r e a l i z e d r e t u r n minus the expected r e t u r n . 1 0 s h a r e h o l d e r s gained from the merger a c t i v i t y . For longer event p e r i o d s , one month announcement e f f e c t and the cumulative e f f e c t from o f f e r announcement through the s u c c e s s f u l outcome, the r e s u l t s are unanimous and s i m i l a r to the 2 and 3 day r e t u r n s . The highest r e t u r n was documented by Dodd at 33.9% from the announcement o f f e r to the f i n a l s u c c e s s f u l outcome. For merger attempts that were e v e n t u a l l y u n s u c c e s s f u l , the 2 day p o s i t i v e r e t u r n i s s t a t i s t i c a l l y s i g n i f i c a n t and i n d i s t i n g u i s h a b l e from those of s u c c e s s f u l mergers. For the event p e r i o d of about 20 days before the announcement o f f e r through the day of the f i r s t p u b l i c announcement, the p o s i t i v e r e t u r n s are a l s o s t a t i s t i c a l l y p o s i t i v e . These r e t u r n s are almost i d e n t i c a l to the r e t u r n s found f o r t a r g e t firms that were s u c c e s s f u l l y merged. However, the t o t a l r e t u r n from the o f f e r announcement through the outcome i s i n c o n c l u s i v e . Dodd found a p o s i t i v e r e t u r n of 3.68% but i t i s not s t a t i s t i c a l l y s i g n i f i c a n t . 2.2.2 TENDER OFFERS Targe t s of s u c c e s s f u l tender o f f e r s gained an average of 29.1% (across 6 s t u d i e s ) . V a r y i n g the event p e r i o d measured does not change the r e s u l t s fundamentally. J a r r e l l and Bradley (80) found that the t a r g e t s of s u c c e s s f u l tender o f f e r s enjoyed an i n c r e a s e of 34% i n the value of t h e i r shares between the p e r i o d 40 days before through 20 days a f t e r the o f f e r announcement. T h i s i s s i m i l a r to evidence 11 r e p o r t e d by Eckbo and Langohr (86) based on takeover bids i n France. For u n s u c c e s s f u l tender o f f e r s , the gains from the o f f e r announcement d i d not d i s s i p a t e . D e s p i t e the f a i l e d attempt, t a r g e t shareholders s t i l l r e t a i n e d the gains from b e f o r e . Bradley, Desai and Kim (83) found that f o r t a r g e t firms that do not r e c e i v e a subsequent o f f e r w i t h i n approximately 2 years, the average shareholder w i l l l o se the gain that was brought about by the announcement e f f e c t of a tender o f f e r . The t a r g e t shareholders of u n s u c c e s s f u l tender o f f e r s r e a l i z e f u r t h e r gains i f a subsequent o f f e r i s r e c e i v e d . 2.2.3 REMARKS The evidence suggests that t a r g e t s h a r e h o l d e r s earn p o s i t i v e abnormal r e t u r n s on the announcement of an o f f e r . Only i n s i t u a t i o n s where the merger attempt f a i l s and the t a r g e t i s not taken over d u r i n g the subsequent 2 years would a t a r g e t shareholder l o s e the gains from the announcement p e r i o d . Overwhelmingly, the evidence supports the notion that takeovers, be i t by mergers or tender o f f e r s , are economically b e n e f i c i a l to t a r g e t s h a r e h o l d e r s . The t a r g e t firms i n s u c c e s s f u l takeovers experienced a s t a t i s t i c a l l y s i g n i f i c a n t abnormal p r i c e change of +20% i n mergers and +30% i n tender o f f e r s . Target shareholders i n c u r r e d a s l i g h t l o s s i n u n s u c c e s s f u l mergers and tender o f f e r s . The 12 s u b s t a n t i a l d iscrepancy seems to i n d i c a t e that the b e n e f i t s of takeovers are only r e a l i z e d when c o n t r o l of the t a r g e t i s turned over to the b i d d e r . T h i s may imply that s t o c k h o l d e r s of p o t e n t i a l t a r g e t f i r m s are harmed when t a r g e t managers oppose takeover bids or take a c t i o n s that e l i m i n a t e or reduce competition f o r c o n t r o l . 2.3 TARGETED REPURCHASES AND STANDSTILL AGREEMENTS In a p r i v a t e l y n e g o t i a t e d or t a r g e t e d repurchase, the f i r m purchases a block of i t s common shares at a p r i c e that i s u s u a l l y above the p r e v a i l i n g market p r i c e . Bradley and Wakeman(83) and Dann and DeAngelo (83) reached s i m i l a r c o n c l u s i o n s i n that the s t o c k h o l d e r s of the repurchasing f i r m experienced negative r e t u r n s when the repurchase was made. When a s t a n d s t i l l agreement was reached i n a s s o c i a t i o n with the repurchase, Dann and DeAngelo found that the firms in t h e i r sample experienced a s t a t i s t i c a l l y s i g n i f i c a n t average r e t u r n of -4.52% over the day before and the day of the announcement of the agreement. Even when the s t a n d s t i l l agreement was unaccompanied by a repurchase, the sha r e h o l d e r s of the fi r m s that agreed to the s t a n d s t i l l agreement l o s t a s t a t i s t i c a l l y s i g n i f i c a n t average of 4%. Bradley and Wakeman r e p o r t e d a s t a t i s t i c a l l y s i g n i f i c a n t l o s s of 2.85% f o r shareholders of the repurchasing f i r m . The l o s s was i n c u r r e d over the day before through the day a f t e r the announcement of the repurchase. 1 3 M o r e i m p o r t a n t l y , t h e y d i v i d e d t h e i r s a m p l e i n t o t h o s e r e p u r c h a s e s t h a t w e r e a s s o c i a t e d w i t h t a k e o v e r c a n c e l l a t i o n s a n d t h o s e t h a t w e r e n o t . F o r t a r g e t e d r e p u r c h a s e s w h e r e n o a c q u i s i t i o n a t t e m p t w a s i n v o l v e d , t h e y f o u n d a s l i g h t l y p o s i t i v e b u t i n s i g n i f i c a n t a b n o r m a l r e t u r n o f .6% t o s h a r e h o l d e r s o f t h e r e p u r c h a s i n g f i r m o v e r t h e p e r i o d f r o m t h e d a y p r i o r t h r o u g h 30 d a y s a f t e r t h e a n n o u n c e m e n t o f a r e p u r c h a s e . I n c o n t r a s t , w h e r e t a k e o v e r c a n c e l l a t i o n s w e r e i n v o l v e d , t a r g e t e d r e p u r c h a s e s a r e o n a v e r a g e a s s o c i a t e d w i t h a n a b n o r m a l n e g a t i v e r e t u r n o f 5 . 5 % f o r t h e r e p u r c h a s i n g f i r m ' s r e m a i n i n g s h a r e h o l d e r s . T h i s f i g u r e i s s t a t i s t i c a l l y s i g n i f i c a n t m e a s u r e d o v e r t h e p e r i o d a d a y b e f o r e t h r o u g h a d a y a f t e r t h e a n n o u n c e m e n t o f t h e r e p u r c h a s e . A n e v e n l a r g e r l o s s w a s f o u n d w h e n t h e e v e n t p e r i o d w a s e x t e n d e d t o i n c l u d e u p t o 18 d a y s a f t e r t h e a n n o u n c e m e n t o f t h e r e p u r c h a s e . B r a d l e y a n d W a k e m a n f u r t h e r r e p o r t e d t h a t t h e l o s s w a s g r e a t e r t h a n t h e a v e r a g e p r e m i u m i n v o l v e d i n a r e p u r c h a s e . I t s e e m s t h a t t h e r e m a i n i n g s h a r e h o l d e r s h a d t o i n c u r t h e e x p e n s e o f t h e p r e m i u m p a i d a n d a l i t t l e m o r e . 2 . 3 . 1 C O R P O R A T E R A I D I N G A N D N O N - P A R T I C I P A T I N G S H A R E H O L D E R S A r e c e n t s t u d y b y M i k k e l s o n a n d R u b a c k ( 1 9 8 5 ) e x a m i n e d t h e c u m u l a t i v e e f f e c t o n n o n - p a r t i c i p a t i n g s h a r e h o l d e r s o f a n i n i t i a l s u b s t a n t i a l ( d e f i n e d a s g r e a t e r t h a n 5%) i n v e s t m e n t i n t h e f i r m t o i t s t e r m i n a t i o n i n e i t h e r a takeover, t a r g e t e d repurchase, takeover by a t h i r d p a r t y or s a l e of the s h a r e s 1 3 . For our purposes, only the subset of firms who engage in greenmail ( t a r g e t e d repurchase) w i l l be d i s c u s s e d . G e n e r a l l y , they found that the share p r i c e of the t a r g e t f i r m i n c r e a s e d on i n i t i a l d i s c l o s u r e of the investment p o s i t i o n . C o n s i s t e n t with the f i n d i n g s of Bradley and Wakeman and Dann and DeAngelo, they a l s o found that when the shares were repurchased by incumbent management, share p r i c e s r e a c t e d n e g a t i v e l y . However, the negative p r i c e e f f e c t s of the t a r g e t e d repurchase i s more than compensated for by the p o s i t i v e p r i c e r e a c t i o n to the i n i t i a l investment. The t o t a l v a l u a t i o n e f f e c t i s a s t a t i s t i c a l l y s i g n i f i c a n t p o s i t i v e abnormal r e t u r n to the remaining sh a r e h o l d e r s of the f i r m . I t should be noted that Mikkelson and Ruback a l s o found that f i r m s that f r e q u e n t l y a c q u i r e only an i n i t i a l n o n - c o n t r o l l i n g stake i n another f i r m u s u a l l y terminated the investment by s e l l i n g the shares back to management. The t o t a l r e t u r n to the t a r g e t shareholders from the a c t i v i t i e s of these i n v e s t o r s , commonly c h a r a c t e r i z e d as c o r p o r a t e r a i d e r s , i s s i g n i f i c a n t l y p o s i t i v e at 1.69% 1 < t. 1 3 S t u d i e s by Bradley and Wakeman and Dann and DeAngelo examined only the impact of t a r g e t e d share repurchases and d i d not c o n s i d e r the impact of the i n i t i a l investment. 1 4 The t o t a l r e t u r n i s equal to the p o s i t i v e 2 day r e t u r n around the announcement of the i n i t i a l investment minus the negative 2 day r e t u r n experienced around the time when the repurchase was announced, i n a d d i t i o n to any r e a c t i o n s to i n t e r m e d i a t e events. 1 5 B a s i c a l l y , s i m i l a r r e s u l t s were obtained by Holderness and Sheehan (1985) when they examined the a c t i v i t i e s of 6 i n v e s t o r s who are f r e q u e n t l y r e f e r r e d to as r a i d e r s . They found s t a t i s t i c a l l y s i g n i f i c a n t t o t a l p o s i t i v e r e t u r n s of 3.2% (t=1.8) to the n o n - p a r t i c i p a t i n g s hareholders when the i n i t i a l investment ended with a repurchase. T h e i r methodology f o r measuring t o t a l r e t u r n i s i d e n t i c a l to that of Mikkelson and Ruback. 2.3.2 REMARKS The evidence c i t e d above from s t u d i e s by Bradley and Wakeman and Dann and DeAngelo suggest that s hareholders are not harmed by t a r g e t e d block purchases unless such a c t i o n s are a s s o c i a t e d with takeover c a n c e l l a t i o n s . Targeted repurchases tend to be more c o s t l y to n o n - p a r t i c i p a t i n g s hareholders i f they are used to prevent a takeover attempt. The o f t e n s u b s t a n t i a l premium p a i d i n block repurchases c o u l d be construed as some form of b r i b e to the s e l l i n g f i r m to cease takeover a c t i v i t i e s . If t h i s i s t r u e , managerial a c t i o n s that reduce or e l i m i n a t e the t h r e a t of takeovers may be c o n s i s t e n t with the managerial entrenchment h y p o t h e s i s . E x p l i c i t a c t i o n s that e l i m i n a t e p o t e n t i a l a c q u i r e r s are c o s t l y to n o n - p a r t i c i p a t i n g s hareholders i n terms of the premium p a i d to the s e l l i n g f i r m ; the o p p o r t u n i t y l o s t i n g a i n i n g from a p o t e n t i a l takeover premium and p o s s i b l y more managerial s h i r k i n g and d e v i a t i o n from value maximizing 1 6 behaviour. The r e s u l t s of Mikkelson and Ruback and Holderness and Sheehan lend support to the s u s p i c i o n that the i n i t i a l block investment c o u l d be a s i g n a l of a f u t u r e takeover attempt. T h i s i s noted by Dann and DeAngelo, "... a l a r g e block s t o c k h o l d e r has a comparative advantage r e l a t i v e to small s t o c k h o l d e r s i n e i t h e r i n i t i a t i n g a takeover attempt or in t r a n s f e r r i n g t h i s a b i l i t y to a t h i r d p a r t y . Moreover, a l a r g e block holder has a g r e a t e r i n c e n t i v e to incur the c o s t s of a takeover attempt s i n c e he stands to capture a g r e a t e r share of any r e s u l t i n g improvements in managerial ef f i c i e n c y " . 3. CORPORATE CONTROL AND GREENMAIL 3.1 THE CASE FOR GREENMAIL A block repurchase - or greenmail - c o u l d p o s s i b l y be a value i n c r e a s i n g a c t i o n even i f a premium i s i n v o l v e d . If the repurchases are accompanied by s t a n d s t i l l agreements, these c o n t r a c t s are e s s e n t i a l l y l i m i t i n g l a r g e block shareholder's d i r e c t i n f l u e n c e over the fir m ' s r e s o u r c e s . The more obvious c o s t saving i s the redundancy of press r e l e a s e s and d e t a i l e d statements to shareholders a d v i s i n g a g a i n s t the c o n s o l i d a t i o n . In the event that a takeover b i d a c t u a l l y m a t e r i a l i z e s , the t a r g e t s t o c k h o l d e r s c o u l d be expected to bear a d d i t i o n a l c o s t s such as the l e g a l and investment banking fees, f i n a n c i a l press r e l e a s e s and proxy s o l i c i t a t i o n forms. Other l e s s obvious c o s t s i n c l u d e management's time spent i n d i r e c t l y fending o f f an a c q u i s i t i o n attempt - time that c o u l d otherwise be more p r o f i t a b l y used. Combined with the out-of-pocket c o s t , opposing a takeover may prove to be an expensive p r o p o s i t i o n . These c o s t savings c o u l d i n p r i n c i p l e outweigh the premium p a i d and any f u r t h e r i n e f f i c i e n c y t h at may be induced by a reduced takeover t h r e a t . T h e r e f o r e , t a r g e t shareholders may stand to b e n e f i t from agreements that l i m i t or reduce the t h r e a t of takeovers. 1 7 18 3.1.1 THE EVIDENCE Despite of the arguments i n favour of greenmail, there i s s trong evidence to suggest the c o n t r a r y . S u c c e s s f u l takeovers increase the wealth of t a r g e t shareholders and the e l i m i n a t i o n of a p o t e n t i a l bidder may be harmful to n o n - p a r t i c i p a t i n g s h a r e h o l d e r s e s p e c i a l l y i f i t a l s o terminates a takeover attempt. T h e r e f o r e , t a r g e t e d block repurchases, s t a n d s t i l l agreements and any a c t i o n on management's part that i s intended to reduce or e l i m i n a t e competition f o r c o n t r o l i s l i k e l y to be harmful to shar e h o l d e r s ' wealth. 4. ANTIGREENMAIL CHARTER AMENDMENTS Before an a n t i g r e e n m a i l p r o p o s a l becomes law, s h a r e h o l d e r s ' approval must be sought. The amendment p r o h i b i t s management from repurchasing i t s shares from a block holder without f i r s t having i t s s h a r e h o l d e r s ' a p p r o v a l . T h i s does not imply that management cannot pay greenmail but simply that p e r m i s s i o n must be granted by i t s shareholders f i r s t . When proposing such an amendment, the f i r m u s u a l l y c l a i m s t h a t , "the board of d i r e c t o r s i s unaware of any takeover b i d f o r the company now pending or threatened". In recommending that the p r o p o s a l be adopted, a t y p i c a l argument would be, "the u n f a i r n e s s of t h i s t a c t i c i s o f t e n accentuated by the f a c t that the s e l l e r has not been a shareholder of long standing but has merely accumulated the shares i n recent purchase with no i n t e n t of remaining an i n v e s t o r i n the company", 1 5 T h i s i m p l i e s that greenmail i s some s o r t of e x t o r t i o n money p a i d to the s e l l e r so that he would withdraw h i s t h r e a t of t a k i n g over the company. Paying e x t o r t i o n money i s c l e a r l y not i n keeping with value maximizing behaviour. "The board of d i r e c t o r s b e l i e v e s that a p p r o p r i a t e a c t i o n should be taken now to p r o t e c t the company from what i t deems to be a p o t e n t i a l abuse of the i n t e r e s t of shareholders as a w h o l e " . 1 6 1 5 Singer Company. 1 6 Warnaco Inc. 19 20 I n t e r e s t i n g l y , management w i l l a l s o o f t e n p o i n t out the disadvantage of the p r o p o s a l . A t y p i c a l and r a t h e r dubious statement from S t e r l i n g Drug's proxy statement i s , "Adoption of the proposed a r t i c l e c o u l d tend to reduce t r a d i n g a c t i v i t y and p o t e n t i a l temporary r i s e s i n the market p r i c e of the company's stock which might otherwise be occasioned by accumulation of a l a r g e s i n g l e block of stock. Thus some present s t o c k h o l d e r s d e s i r i n g to s e l l i n the market at that time may be d e p r i v e d of o p p o r t u n i t i e s to s e l l t h e i r stock at t e m p o r a r i l y higher market p r i c e s . " However, the t y p i c a l f i r m i s quick to add t h a t , the board b e l i e v e s that even handed treatment of s t o c k h o l d e r s i s of s u f f i c i e n t importance and b e n e f i t to a l l shareholders to more than o f f s e t these p o s s i b l e d i s a d v a n t a g e s " . 1 7 4.1 STOCKHOLDER INTEREST HYPOTHESIS The purpose of t h i s paper i s to t e s t f o r the economic s i g n i f i c a n c e of an a n t i g r e e n m a i l c h a r t e r amendment. A p p r o p r i a t e l y m o d i f i e d , the s t o c k h o l d e r i n t e r e s t h y p othesis c o u l d be used to meet our needs and act as the t e s t h y p o t h e s i s . The evidence documented by Bradley and Wakeman i n d i c a t e that e l i m i n a t i n g a p o t e n t i a l bidder and consequently having a takeover b i d withdrawn i s harmful to t a r g e t s h a r e h o l d e r s . Since most takeovers are a s s o c i a t e d with a premium o f f e r , g r e e n m a i l i n g a p o t e n t i a l a c q u i r e r to withdraw i n f l i c t s a c l e a r c o s t to n o n - p a r t i c i p a t i n g s h a r e h o l d e r s . Moreover, i t may a l s o p r o v i d e incumbent management with the o p p o r t u n i t y 1 7 I n t e r n a t i o n a l M i n e r a l s and Chemical. 21 to r a i s e i t s p e r q u i s i t e consumption as c o n t r o l of the c o r p o r a t i o n i s more f i r m l y vested i n i t s e l f . From a s e l f - s e r v i n g management's p o i n t of view, the premium i s w e l l j u s t i f i e d i f i t pre c l u d e s f u r t h e r c o m petition f o r c o n t r o l from the s e l l i n g s hareholder. T h e r e f o r e , t a r g e t e d repurchase and s t a n d s t i l l agreement or simply greenmail, c o u l d be i n t e r p r e t e d as a " b r i b e [to] the s e l l i n g f i r m i n t o g i v i n g up i n t e r e s t i n the f i r m and by i m p l i c a t i o n cease monitoring the f i r m ' s a c t i v i t i e s " . 1 8 I t coul d e f f e c t i v e l y e l i m i n a t e a t h r e a t to t h e i r c o n t r o l of the f i rm. An a n t i g r e e n m a i l c h a r t e r amendment would then expose incumbent management to the s c r u t i n y of p o t e n t i a l a c q u i r e r s . As d i s c r e t i o n a r y use of greenmail would be i l l e g a l , management w i l l be l e s s a b l e to s e l e c t i v e l y e l i m i n a t e t h r e a t s to t h e i r c o n t r o l over the f i r m . Instead, management would be encouraged to maximize the value of the f i r m so that a takeover w i l l be more c o s t l y and l e s s d e s i r a b l e . Shareholders might b e n e f i t i n s e v e r a l ways from such an amendment. In a t y p i c a l takeover b i d , s hareholders w i l l have access to a premium p r i c e o f f e r e d f o r t h e i r shares. Greenmail cannot be used, without t h e i r p e r m i s s i o n , to b r i b e the p o t e n t i a l a c q u i r e r i n t o withdrawing h i s c h a l l e n g e . The amendment puts the d e c i s i o n f o r the use of co r p o r a t e a s s e t s i n the hands of those most a f f e c t e d by i t . 1 8 Bradley and Wakeman (83) p 327. 22 Incumbent management w i l l not and cannot be f o r c e d i n t o paying e x t o r t i o n money. T h i s should discourage r a i d e r s whose sol e purpose i s to f o r c e t a r g e t management i n t o paying greenmail through t h r e a t s of d i s r u p t i o n s to the f i r m ' s o p e r a t i o n s . Management, having v o l u n t a r i l y t i e d i t s own hands by ren d e r i n g i l l e g a l the use of an e f f e c t i v e takeover defense, are more v u l n e r a b l e to the c o m p e t i t i v e f o r c e s i n the market for c o r p o r a t e c o n t r o l . Consequently, t h i s , may a l l e v i a t e a c e r t a i n degree of management-stockholder c o n f l i c t of i n t e r e s t . Management may a l i g n i t s i n t e r e s t more c l o s e l y with that of t h e i r s hareholders and pursue more d i l i g e n t l y a p o l i c y that maximizes i t s s h a r e h o l d e r s ' wealth. Hence, an a n t i g r e e n m a i l c h a r t e r amendment may be b e n e f i c i a l to s h a r e h o l d e r s . A f i r m proposing such an amendment i s p r e d i c t e d to experience an i n c r e a s e i n i t s market value when the news reaches i n v e s t o r s . 5. DATA SOURCES AND METHODOLOGY 5.1 THE DATA I n i t i a l l y , 48 f i r m s were noted by the p e r i o d i c a l Mergers and Acquisitons as h a v i n g p r o p o s e d a n t i g r e e n m a i l c h a r t e r amendments. 23 had , i n a d d i t i o n to the a n t i g r e e n m a i l p r o p o s a l s , o ther p r o p o s a l s such as e l e c t i n g new d i r e c t o r s , s t a g g e r i n g or c l a s s i f y i n g the c u r r e n t board of d i r e c t o r s , compensat ion packages , a u t h o r i z i n g new s t o c k , a l l o w i n g c u m u l a t i v e v o t i n g and r e q u i r i n g a s u p e r m a j o r i t y vote i n c e r t a i n i n s t a n c e s of t a k e o v e r s . The Info GIobe s e r v i c e was used to o b t a i n a copy of each proxy s t a t e m e n t . Of the 48 f i r m s , Info Globe c o u l d o n l y f u r n i s h the proxy s ta tements f o r 40 of the f i r m s . W i t h i n these 40 f i r m s , 3 of them were not a v a i l a b l e on the C e n t r e f o r R e s e a r c h i n S e c u r i t i e s P r i c e s (CRSP) t a p e . T h i s f u r t h e r reduced the sample to 37. Of the r e m a i n i n g f i r m s , 5 of the "proxy s t a t e m e n t s " were merely reminders to t h e i r s h a r e h o l d e r s of the proxy t h a t was sent e a r l i e r . Thus the day t h a t the a c t u a l proxy was sent c o u l d not be e s t a b l i s h e d . F i n a l l y , C o n t i n e n t a l I n f o r m a t i o n System d i d not have data p r i o r to F e b r u a r y 1985 on the (CRSP) tape and thus i t s parameters c o u l d not be e s t i m a t e d . The count f o r the f i n a l sample i s 31. These proxy s ta tements were m a i l e d to the s h a r e h o l d e r s but t h e r e i s no a s s u r a n c e t h a t the f i n a n c i a l p r e s s would have made a note of r e p o r t i n g i t . Nor i s t h e r e any c e r t a i n t y 23 24 that such p u b l i c a t i o n s are t i m e l y . For an event-time study to be reasonably v a l i d , i t i s necessary to i d e n t i f y the day that news of the c h a r t e r amendments were f i r s t made a v a i l a b l e to market p a r t i c i p a n t s . Before a proposed amendment i s put forward f o r shareholders' a p p r o v a l , i t has to be r a t i f i e d by the board of d i r e c t o r s . Again, there i s no c e r t a i n t y that press r e l e a s e s were made at the board meeting. Upon the board of d i r e c t o r s ' a p p r o v a l , the proposed amendments are pl a c e d before the sh a r e h o l d e r s . T h i s i s u s u a l l y done through a proxy statement d e s c r i b i n g the amendments. By t h i s time some " i n s i d e r s " may a l r e a d y have knowledge of the p r o p o s a l s . Outside s t o c k h o l d e r s w i l l at the l a t e s t l e a r n of the proposed amendments when they r e c e i v e the proxy statements. At the same time that the proxy i s sent to shar e h o l d e r s , a copy i s sent to the S e c u r i t i e s Exchange Commission to be o f f i c i a l l y f i l e d . The date on the proxy statement i s u s u a l l y before the date that the SEC o f f i c i a l l y f i l e s the proxy. As such, i t pr o v i d e s the b a s i s f o r r e c o g n i z i n g the date of the proxy statement as being the f i r s t day the p u b l i c has access to the new in f o r m a t i o n contained w i t h i n the proxy statement. To double check, the Wall Street Journal Index was scanned f o r a p o s s i b l e e a r l i e r mention of the proposed amendment. The WSJI d i d c o n f i r m that the m a j o r i t y of the fir m s i n the sample had made such p r o p o s a l s . The f i r s t 25 mention i n the WSJI e i t h e r acknowledges that the board of d i r e c t o r s had put f o r t h the a n t i g r e e n m a i l proposal or that the shareholders had approved of the a n t i g r e e n m a i l c h a r t e r amendment. However, a l l of these dates were subsequent to the dates of the corresponding proxy statements. See Table 1 for a frequency d i s t r i b u t i o n of proxy statement m a i l dates. 5.2 THE METHODOLOGY An event study methodology i d e n t i c a l to that of Fama, F i s h e r , Jensen and R o l l ' s (1969) w i l l be used. The s t a t i s t i c a l procedure e n t a i l s the e s t i m a t i o n of the impact of a n t i g r e e n m a i l c h a r t e r amendments on fi r m s ' common stock p r i c e s . Assuming that the market model c o r r e c t l y s p e c i f i e s the s t o c h a s t i c r e t u r n g e n e r a t i n g process, the r e t u r n to s e c u r i t y / i s given as, R.,. = (a*. + £. R . ) + e. t i t I K i mt i t The term i n the p a r e n t h e s i s i s the normal r e t u r n to s e c u r i t y / as i m p l i e d by the market m o d e l 1 9 , a i s the r e t u r n u n r e l a t e d to the systematic r i s k of the s e c u r i t y . j3 measures the s e c u r i t y ' s s e n s i t i v i t y to the market, e i s a normally d i s t r i b u t e d e r r o r term f o r s e c u r i t y / where the s t a t i s t i c a l p r o p e r t i e s of independence and equal v a r i a n c e are assumed to 1 9 Since d a i l y r e t u r n s are very c l o s e to being c o n t i n u o u s l y compounded, l o g r e t u r n s are not used. 26 Table 1 Frequency d i s t r i b u t i o n of proxy statements m a i l e d by month and summary of other p r o p o s a l s t h a t may be c o n t a i n e d w i t h i n the same statement. Only the f i r m s i n the f i n a l sample are t a b l e d . 1984 1985 Sep Oct Nov Dec Jan Feb Mar Apr May Jun J u l Aug Sep TOT 1 1 2 2 12 4 2 1 2 4 31 C o r p o r a t i o n F a i r P r i c e S u p e r m a j o r i t y C l a s s i f i e d Cumulative Clause P r o v i s i o n s Board V o t i n g Acme+ Aluminum Co American Pres.-t-Apache Bank Bldg Equip+ B e l l + B u r l i n g t o n Cheesebrough+ Dover Corp D r e s s e r Ind E a s t e r n G: and F Fleetwood Ent+ Gould Inc H a r r i s Corp I n t e r c o Int'1 Min Chem+ In t ' 1 M u l t i f o o d K e r r McGee L u b r i z o l MSI M a r t i n M a r i e t t a Merck NBI NCR+ P e r k i n Elmer+ Si n g e r S t e r l i n g Sun+ Thomas B e t t s U n i v a r Warnaco * * * * * * * * * * * * * * * * * * * * + I n d i c a t e f i r m s t h a t d i d not propose a n t i t a k e o v e r amendments i n the same proxy statement. 27 be s a t i s f i e d . Hat denotes an estimated f i g u r e . The model p r e d i c t s a contemporaneous l i n e a r r e l a t i o n s h i p between the r e a l i z e d market r e t u r n and the r e a l i z e d s e c u r i t y r e t u r n 2 0 . Abnormal r e t u r n s f o r s e c u r i t y / at time t i s measured as, A R i t = R . t - £ . R m t ) The f i r s t term on the r i g h t hand s i d e i s the a c t u a l r e a l i z e d r e t u r n on s e c u r i t y / and the remainder i s the estimated normal r e t u r n d e r i v e d from the market model. The average abnormal r e t u r n i s obtained by summing acro s s a l l firms at time t, AARfc = Z"i = ] AR i f c / N where N i s the number of firms i n the sample. T h i s c r o s s s e c t i o n a l mean w i l l be used to measure the s e c u r i t i e s ' r e a c t i o n s to the f i r s t p u b l i c l y a v a i l a b l e news of an a n t i g r e e n m a i l c h a r t e r amendment 2 1. The advantage of using an average to measure the impact i s that i t randomizes the 2 0 The s i n g l e f a c t o r market model i s not s i g n i f i c a n t l y i n f e r i o r to more complicated m u l t i - f a c t o r models. See Brown and Warner (1980). 2 1 The event dates seem to be c l u s t e r e d . T h i s may present a problem i n contemporaneous c o r r e l a t i o n of r e t u r n s . T h i s problem w i l l be touched on l a t e r i n the paper. 28 i n f l u e n c e of other contemporaneous f i r m s p e c i f i c or market wide f a c t o r s that are u n r e l a t e d to the a n t i g r e e n m a i l c h a r t e r amendment 2 2 . For each f i r m , the f i r s t p u b l i c l y a v a i l a b l e news of a proposed a n t i g r e e n m a i l c h a r t e r amendment w i l l be designated as event time 0. For purposes of a n a l y s i s , c h r o n o l o g i c a l time i s transformed to event time. The day p r i o r to the f i r s t a v a i l a b l e news i s desi g n a t e d as day -1. The f i r s t day a f t e r the news i s designated as day +1. And so on. The market model parameters, a and 0 , w i l l be estimated from a time s e r i e s r e g r e s s i o n using s e c u r i t y /'s r e t u r n i n c l u d i n g d i v i d e n d s and an equal weighted market r e t u r n i n c l u d i n g d i v i d e n d s . These data were taken from the CRSP tape. D a i l y r e t u r n s between June 1983 and June 1984 were used f o r e s t i m a t i n g the parameters of 30 fi r m s i n the sample. The parameters f o r American P r e s i d e n t Company were estimated from data c o v e r i n g the p e r i o d from September 1983 to September 1984 as p r i o r to t h a t the CRSP tape d i d not c o n t a i n any d a t a 2 3 . No data c l o s e r than 8 months to the f i r s t p u b l i c l y a v a i l a b l e news date were used f o r e s t i m a t i o n purposes. The cumulative average abnormal r e t u r n i s simply the sum of the average abnormal r e t u r n at time t over the event p e r i o d , which i s , 2 2 I t was p o i n t e d out that a n t i g r e e n m a i l c h a r t e r amendments are sometimes accompanied by other amendments i n the same proxy that i s being sent to s h a r e h o l d e r s . The market's r e a c t i o n may be contaminated i n t h i s sense. To some extent, averaging a c r o s s f i r m s may a l l e v i a t e extraneous impacts. 2 3 See Appendix 1A f o r the r e g r e s s i o n parameters. 29 CAAR = . AAR, where j i s the f i r s t day of the cumulative s e r i e s and k i s the l a s t day of the s e r i e s . The sample v a r i a n c e of the average abnormal r e t u r n s 2 " i s g iven as, s a a r = £ t = 8/83 ( A A V ^ ) 2 / M i s the number of days i n the e s t i m a t i o n p e r i o d and AAR with the bar i s e q u i v a l e n t to the grand mean. Under the n u l l h y p o thesis of zero d a i l y abnormal r e t u r n , the t s t a t i s t i c to t e s t f o r s i g n i f i c a n c e i s , * " AAV S a a r For the cumulative s e r i e s , the t e s t s t a t i s t i c i s , t = CAAR / s c a a r where s c a a r = s a a r /X, 2 " The v a r i a n c e i s c a l c u l a t e d u sing b a s i c a l l y the same set of data that was used f o r e s t i m a t i n g the parameters. T h e r e f o r e i t excludes event day 0 and at l e a s t 8 months before that day. The time frame i s from August 1983 to June 1984. 30 where X i s the number of days in the cumulative s e r i e s . The impact of an a n t i g r e e n m a i l c h a r t e r amendment i s expected to be f e l t around the day the proxy statement was dated. S t a t i s t i c s f o r 2 day event p e r i o d (0,+1) and 3 day event p e r i o d (-1 to +1) w i l l be presented. The compounded 2 day re t u r n (day 0, + l) i s , AAR Q 1 = (1 + A A R Q M I +AkR]) - 1 and i t s standard d e v i a t i o n i s , s = s a a r ^ 2 The t s t a t i s t i c i s t h e r e f o r e the r a t i o of the 2 day compound r e t u r n over the 2 day standard d e v i a t i o n . The 3 day compound r e t u r n i s s i m i l a r l y d e r i v e d . 6. EMPIRICAL RESULTS The procedure f o r determining the s i g n i f i c a n c e of an a n t i g r e e n m a i l c h a r t e r amendment f i r s t e n t a i l s e s t i m a t i n g that part of the r e t u r n which i s i n excess of what i s expected around the time that the amendment was proposed. T h i s excess r e t u r n , or abnormal r e t u r n , may be d e r i v e d from s e v e r a l a l t e r n a t i v e methods. The r e s u l t s of 4 d i f f e r e n t ways of determining abnormal r e t u r n s w i l l be shown. 6.1 VARYING DEFINITIONS OF ABNORMAL RETURNS The p r e v i o u s s e c t i o n d e f i n e d the e s t i m a t i o n of a f i r m ' s a and /3 as the r e g r e s s i o n of a f i r m ' s r e t u r n s on a market index's r e t u r n s . These are i n t u r n used to d e r i v e a f i r m ' s expected r e t u r n and subsequently abnormal r e t u r n s . Other methods of e s t i m a t i n g abnormal r e t u r n s do not r e q u i r e f i r s t e s t i m a t i n g a f i r m ' s parameters. The 4 chosen methods are, Method 1; The parameters are estimated with an equal weighted market index and the abnormal r e t u r n s are c a l c u l a t e d as d e f i n e d i n the p r e v i o u s s e c t i o n . Method 2; Instead of using an equal weighted market index, a value weighted index i s used. Method 3: The market model i s not r e q u i r e d i n t h i s method. The expected r e t u r n on a f i r m ' s s e c u r i t y i s simply assumed to be the equal weighted market index's r e t u r n . The abnormal r e t u r n s are thus d e f i n e d as the r e a l i z e d r e t u r n minus the r e t u r n on the market index. 31 3 2 Method 4: The expected r e t u r n i s an average of the f i r m ' s d a i l y r e t u r n during the p e r i o d from June 1983 to June 19842 5 . Abnormal r e t u r n s are c a l c u l a t e d as the r e a l i z e d r e t u r n minus the average r e t u r n . G e n e r a l l y the f i r s t 2 methods may be known as the market model, method 3 i s the market a d j u s t e d model and method 4 i s the mean a d j u s t e d model. 6.1.1 METHOD 1 RESULTS Average abnormal r e t u r n s and cumulative average abnormal r e t u r n s to s t o c k h o l d e r s of firms that proposed a n t i g r e e n m a i l c h a r t e r amendments are presented i n Table 2 2 6 . The most prominent p a t t e r n i s the s t e a d i l y i n c r e a s i n g negative cumulative average abnormal r e t u r n s from event day -10 to +2. The compounded average abnormal r e t u r n over the f i r s t day the news was a v a i l a b l e and the day a f t e r was -.74%. The t s t a t i s i t i c i s -1.47. T h i s i s i n s i g n i f i c a n t at the 10% l e v e l . The 3 day compound r e t u r n i s -1% with a t s t a t i s t i c of -1.68. T h i s i s s t a t i s t i c a l l y s i g n i f i c a n t at the 10% l e v e l . S t o c k h o l d e r s i n these f i r m s seem to r e a l i z e wealth decreases (weakly s i g n i f i c a n t l y ) during the p e r i o d immediately preceeding the proxy statement date. The cumulative average abnormal r e t u r n to shareholders over the 2 5 With the exception of American P r e s i d e n t . T h i s i s i d e n t i c a l to the p e r i o d used f o r e s t i m a t i n g the parameters. 2 6 The l a g 1 to 5 a u t o c o r r e l a t i o n c o e f f i c i e n t s f o r the AAR's (-30 to +30) of a l l the methods were w i t h i n 2 standard e r r o r s with the e x c e p t i o n of the l a g 4 a u t o c o r r e l a t i o n c o e f f i c i e n t i n Table 5. 33 Ta b l e 2 Average abnormal r e t u r n s and cu m u l a t i v e average abnormal r e t u r n s f o r event p e r i o d 10 days b e f o r e to 10 days a f t e r the f i r s t p u b l i c l y a v a i l a b l e news of an a n t i g r e e n m a i l p r o p o s a l . The r e t u r n s and parameters were e s t i m a t e d with the use of an equal weighted market index. Event Day AAR t CAAR t -10 -.0032 -0.89 -.0032 -0.89 -9 -.0011 -0.32 -.0043 -0.86 -8 -.0007 -0.19 -.0050 -0.81 -7 -.0043 -1 .20 -.0093 -1.31 -6 .001 5 0.43 -.0078 -0.98 -5 -.0006 -0.16 -.0083 -0.95 -4 -.0012 -0.34 -.0096 -1 .02 -3 -.0044 -1 .25 -.0140 -1 .40 -2 .0017 0.46 -.0123 -1.15 -1 -.0031 -0.86 -.0154 -1 .37 0 -.0036 -1.10 -.0190 -1.61 1 -.0038 -1 .07 -.0228 -1.85* 2 .0013 0.36 -.0215 -1 .67* 3 .0040 1.12 -.0175 -1.31 4 .0014 0.40 -.0160 -1.16 5 .0016 0.46 -.0144 -1.01 6 -.0010 -0.29 -.0154 -1 .05 7 -.0024 -0.67 -.0177 -1.14 8 .0022 0.62 -.0155 -1 .00 9 -.0026 -0.72 -.0181 -1.14 10 -.0020 -0.57 -.0201 -1 .23 * S i g n i f i c a n t a t the 10% l e v e l . ** S i g n i f i c a n t a t the 5% l e v e l . 34 _ _ O C D O I 1 : Y ZO'O O'O ZO'O- PQ'O-N d n i _ 3 d SS33X3 3 A I i U i n H D 3 { 35 event p e r i o d -10 to +1 i s -2.28% with a t - s t a t i s t i c of -1.85. T h i s i s s t a t i s t i c a l l y s i g n i f i c a n t at the 10% l e v e l . The cumulative r e t u r n i s i n s i g n i f i c a n t a f t e r event day +2. Longer event p e r i o d s of -1 to +5, -1 to +10, -10 to +10 and -30 to +30 d i d not y i e l d any s i g n i f i c a n t f i n d i n g s . A p l o t of the CAAR i s i n F i g u r e 1. 6.1.2 METHOD 2 RESULTS Va r y i n g the market index from an e q u a l l y weighted index to a value weighted index produced almost i d e n t i c a l r e s u l t s . The e n t i r e procedure f o r e s t i m a t i n g the parameters and c a l c u l a t i n g abnormal r e t u r n s was repeated before d e r i v i n g the r e l e v a n t s t a t i s t i c s . Appendix 2 c o n t a i n s the average abnormal r e t u r n s and cumulative average abnormal r e t u r n s . The compound r e t u r n over event day 0 to +1 i s a s t a t i s t i c a l l y i n s i g n i f i c a n t -.7%. U n l i k e the r e s u l t s when using an equal weighted market index, the 3 day compound r e t u r n of -.87% i s i n s i g n i f i c a n t l y d i f f e r e n t from zero. For longer event p e r i o d s , the r e s u l t s are almost i d e n t i c a l as b e f o r e . The average stockholder experienced a wealth d e c l i n e of about 4% between the event p e r i o d -30 to +30. A p l o t of the cumulative r e t u r n s i s i n Appendix 3. The cumulative average abnormal r e t u r n over event days -10 to +1 i s s i m i l a r l y s t a t i s t i c a l l y s i g n i f i c a n t at the 10% l e v e l but only m a r g i n a l l y s i g n i f i c a n t at the 5% l e v e l . The r e t u r n was -2.48% compared with the r e t u r n of -2.28% when an equal weighted index i s used. The t s t a t i s t i c i s -1.96. 36 6.1.3 METHOD 3 RESULTS I t can reasonably be concluded that the ch o i c e of market i n d i c e s had a minimal e f f e c t on the r e s u l t s . However, the r e s u l t s may be s e n s i t i v e to model s p e c i f i c a t i o n s . The average abnormal r e t u r n s and the cumulative average abnormal r e t u r n s f o r t h i s method i s found in Appendix 4. The p r e v i o u s 2 methods found s t a t i s t i c a l l y i n s i g n i f i c a n t negative r e s u l t s f o r abnormal r e t u r n s over the 2 and 3 day p e r i o d s . T h i s method a l s o f a i l e d to show any s i g n i f i c a n t negative r e s u l t s . The 3 day compound r e t u r n of -1.1% i s only m a r g i n a l l y s i g n i f i c a n t at the 10% t e s t l e v e l . As the event p e r i o d measured became longer, the abnormal l o s s e s i n c r e a s e d . So f a r , t h i s i s the gene r a l p a t t e r n . The l o s s e s are not s t a t i s t i c a l l y s i g n i f i c a n t though. The CAAR i s p l o t t e d i n Appendix 5. 6.1.4 METHOD 4 RESULTS T h i s method d i d not produce any s i g n i f i c a n t r e s u l t s . In f a c t , the l o s s e s found f o r the v a r i o u s h o l d i n g p e r i o d s were the s m a l l e s t . The average abnormal r e t u r n s and the correspo n d i n g cumulative r e t u r n s are i n Appendix 6. The CAAR p l o t i s i n Appendix 7. The negative abnormal r e t u r n s over event day (0,+1) i s 0.36% (t=-0.33). The l a r g e s t l o s s o c c u r r e d over event days -10 to +1. T h i s l o s s was -1.91% (t=-0.73) compared with the -2.3% and -2.5% l o s s under methods 1 and 2. 37 6.2 SUMMARY OF THE RESULTS The r e s u l t s when using the market model for e s t i m a t i n g expected r e t u r n s were not c o n s p i c u o u s l y d i f f e r e n t from the other r e s u l t s . Table 3 shows the comparative s t a t i s t i c s . Both methods that used the market model produced s t a t i s t i c a l l y s i g n i f i c a n t r e s u l t s f o r event p e r i o d -10 through +1. Methods 1 and 3 had i d e n t i c a l l o s s e s over the p e r i o d -1 to +1 of 1.1%. These were only m a r g i n a l l y s i g n i f i c a n t at the 10% t e s t l e v e l . At t h i s stage, i t i s d i f f i c u l t to make any reasonable i n f e r e n c e s . The d i s p a r i t y between the r e s u l t s of the d i f f e r e n t methods c o u l d be a t t r i b u t e d to s e v e r a l f a c t o r s . F i r s t l y , the market model c o u l d be m i s s p e c i f i e d . In which case, methods 3 and 4 would provide a b e t t e r i n d i c a t i o n of the impact of the p r o p o s a l . Secondly, the c l u s t e r i n g of event day 0 c o u l d r e s u l t i n contemporaneous c o r r e l a t i o n of excess r e t u r n s . In other words, c r o s s - s e c t i o n a l independence of excess r e t u r n s may not h o l d t r u e . As with the case of monthly data, Brown and Warner found that the "OLS market model and using standard parametric t e s t s are w e l l s p e c i f i e d under a v a r i e t y of c o n d i t i o n s " . Addressing the second problem, the authors concluded that c l u s t e r i n g does not s i g n i f i c a n t l y a l t e r the r e s u l t s on model s p e c i f i c a t i o n . More p r e c i s e l y , the authors noted that the market a d j u s t e d model and the market model t y p i c a l l y pass the t e s t f o r c o r r e c t s p e c i f i c a t i o n . The mean 38 Table 3 Abnormal returns for various length of event periods surrounding the f i r s t p u b l i c l y a v a i l a b l e news of an a n t i -greenmail proposal. Comparative s t a t i s t i c s for 4 d i f f e r e n t ways of measuring abnormal returns are shown, t s t a t i s t i c s are within the parentheses. Event. day Method 1 Method 2 Method 3 Method 4 0, + 1 -.0074 -.007 -.0081 -.0036 (-1.47) (-1.33) (-1.50) (-0.33) -1 to + 1 -.010* -.0087 -.0111* -.0047 (-1.68) (-1.37) (-1.68) (-0.35) -1 to +5 -.0021 -.0006 -.0031 .0065 (-0.08) (-0.02) (-0.15) (0.12) -1 to + 10 -.0078 -.0071 -.0003 .0052 (-0.18) (-0.16) (-0.01 ) (0.06) -10 to + 1 -.0228* -.0248** -.0204 -.0191 (-1.85) (-1.96) (-1.57) (-0..73) -10 to + 10 -.0201 -.0.140 -.0196 -.0092 (-1.23) (-0.83) (-1.14) (-0.25) -30 to +30 -.0315 -.0403 -.0320 +.0144 (-1.13) (-1.41) (-1.09) ( 0.24) S.D. 0.0036 0.0037 0.0038 0.0078 S i g n i f i c a n t at the 10% l e v e l . ' S i g n i f i c a n t at the 5% l e v e l . 39 a d j u s t e d model performed p o o r l y though. They t e s t e d the n u l l h y p o t h e s i s t h a t the c u m u l a t i v e mean exce s s r e t u r n over the i n t e r v a l (-5,+5) i s e q u a l t o 0. With c l u s t e r i n g , the market a d j u s t e d r e t u r n (method 3) and the market model had r e j e c t i o n r a t e s of 4% and 3.2% r e s p e c t i v e l y when t h e r e were a c t u a l l y no abnormal r e t u r n s . T h i s i s w i t h i n the u s u a l s i g n i f i c a n c e t e s t l e v e l . The mean a d j u s t e d model had a r e j e c t i o n r a t e of 13.6%. C l e a r l y t h e i r r e s u l t s i n d i c a t e t h a t the market a d j u s t e d model and the market model would y i e l d more a c c u r a t e r e s u l t s when event day 0 may be c h r o n o l o g i c a l l y c l o s e t o g e t h e r . 6.3 MULTIPLE AMENDMENT PROPOSALS As a l l u d e d t o e a r l i e r , some f i r m s proposed o t h e r amendments i n the same proxy s t a t e m e n t . T a b l e 1 i n d i c a t e d t h a t 10 f i r m s out of the sample d i d not propose amendments such as f a i r p r i c e p r o v i s i o n s , s t a g g e r e d boards and s u p e r m a j o r i t y p r o v i s i o n s - a l l of which may be g e n e r a l l y c l a s s i f i e d as a n t i t a k e o v e r amendments. To i s o l a t e the impact of an a n t i g r e e n m a i l c h a r t e r amendment as much as p o s s i b l e , the e n t i r e p r o c e d u r e of t e s t i n g f o r s i g n i f i c a n c e of e x c e s s r e t u r n s was r e p l i c a t e d f o r the 10 f i r m s . G i v e n the s m a l l sample s i z e , the i s s u e of n o n - n o r m a l i t y i n the c r o s s - s e c t i o n a l e x c e s s r e t u r n s must be acknowledged. 40 6.3.1 RESULTS FOR THE REDUCED SAMPLE To minimize the e f f e c t s that the c l u s t e r i n g of event day 0 may produce, abnormal r e t u r n s are c a l c u l a t e d as the r e a l i z e d r e t u r n l e s s the expected r e t u r n as i m p l i e d by the market model using as equal weighted index (method 1). Comparative s t a t i s t i c s w i l l be p r o v i d e d by the r e s u l t s when us i n g the equal weighted market index as the expected r e t u r n (method 3). Tables 4 and 5 show the average abnormal r e t u r n s and the cumulative r e t u r n s f o r the 2 methods. P l o t s of the r e s p e c t i v e CAARs i s i n F i g u r e s 2 and 3. Both CAAR e x h i b i t s the same p a t t e r n from -10 to + 1^as the previous f i n d i n g s . The cumulative average abnormal r e t u r n from 10 days before through the day a f t e r the proxy was mailed were -3.7% (t=-2.05) and -3.1% (t=-1.63) fo r the market model and the market adj u s t e d model. Only the market model's excess r e t u r n i s s i g n i f i c a n t l y d i f f e r e n t from 0. The r e t u r n s f o r longer h o l d i n g p e r i o d s are a l s o n e g a t i v e . T h i s i s not u n l i k e the r e s u l t s f o r the f u l l sample of 31 f i r m s . The l o s s over h o l d i n g p e r i o d s of 21 days (-10 to +10) and 61 days (-30 to +30) averaged about 3.5% and 3.2% r e s p e c t i v e l y f o r the 2 methods under c o n s i d e r a t i o n . However, these l o s s e s are not s t a t i s t i c a l l y s i g n i f i c a n t . The most s t r i k i n g f i n d i n g with the reduced sample i s the s t a t i s t i c a l l y s i g n i f i c a n t l o s s over s h o r t e r event p e r i o d s . Whereas the p r e v i o u s r e s u l t s d i d not produce any s i g n i f i c a n t f i g u r e s , the 10 firms averaged a 2 day compound 41 Ta b l e 4 Average abnormal r e t u r n s and cumulative average abnormal r e t u r n s f o r the 10 f i r m s t h a t d i d not propose a n t i t a k e o v e r measures, i n the same proxy statement. Abnormal r e t u r n s are c a l c u l a t e d as the r e a l i z e d r e t u r n minus the r e t u r n i m p l i e d by the market model u s i n g an equal weighted market index. Event day AAR t CAAR t -10 -.0025 -0.46. -.0025 -0.46 -9 .0022 0.04 -.0003 -0.04 -8 -.0082 -1 .52 -.0085 -0.92 -7 -.0024 -0.45 -.0109 -1 .02 -6 .0088 1 .63 -.0021 -0.17 -5 -.0027 -0.51 -.0048 -0.36 -4. .0006 0.27 -.0042 -0.30 -3 .0015 0.27 -.0027 -0.18 -2 -.0016 -0.30 -.0033 -0.21 -1 -.0142 -2.64** -.0175 -1 .03 0 -.0037 -0.68 -.0212 -1 .20 1 -.0158 -2.94** -.0370 -2.05* 2 .0075 1 .40 -.0295 -1 .55 3 .0049 0.91 -.0246 -1 .23 4 .0005 0.09 -.0241 -1 .21 5 -.0017 -0.32 -.0258 -1 .21 6 .0001 0.03 -.0257 -1.17 7 -.0004 -0.07 -.0261 -1 .15 8 -.0032 -0.59 -.0293 -1 .27 9 -.0069 -1.28 -.0362 -1.51 10 -.0008 -0.15 -.0370 -1 .54 * S i g n i f i c a n t a t the 10% l e v e l . ** S i g n i f i c a n t a t the 5% l e v e l . Table 5 Average abnormal returns and cumulative average abnormal returns for the 10 firms that d i d not propose antitakeover measures in the same proxy statement. Abnormal returns are calcula t e d as the r e a l i z e d return minus the equal weighted market index.. Event day AAR t CAAR t -10 -.0027 -0.49 -.0027 -0.49 -9 .0018 0.34 -.0009 -0.12 -8 -.0096 -1 .25 -.0105 -1.12 -7 -.0030 -0.55 -.0135 -1 .24 -6 .0097 1 .78 -.0038 -0.31 -5 -.0026 -0.47 -.0064 -0.48 -4 .0016 0.29 -.0048 -0.33 -3 .0026 0.48 -.0022 -0.14 -2 .001 1 0.20 -.0011 -0.07 -1 -.0111 -2.11*' -.0127 -0.75 0 -.0035 -0.65 -.0162 -0.90 1 -.0146 -2.68** -.0308 -1 .63 2 .0065 1.19 -.0243 -1 .23 3 .0030 0.55 -.0213 -1 .07 4 .0013 0.24 -.0200 -0.95 5 -.0017 -0.32 -.0217 -0.98 6 .0007 0.12 -.0210 -0.95 7 -.0013 -0.24 -.0223 -0.97 8 -.0033 -0.60 -.0256 -1 .08 9 -.0063 -1.14 -.0319 -1 .33 10 -.0016 0.29 -.0335 -1 .34 * S i g n i f i c a n t at the 10% l e v e l . ** S i g n i f i c a n t at the 5% l e v e l . 43 45 r e t u r n o f - 2 % ( t = - 2 . 5 7 ) f o r t h e m a r k e t m o d e l a n d - 1 . 8 % ( t = - 2 . 3 5 ) f o r t h e m a r k e t a d j u s t e d m o d e l . T h e s e s t a t i s t i c a l l y s i g n i f i c a n t l o s s e s a r e s l i g h t l y o v e r 1% h i g h e r t h a n t h e r e s u l t s f o r t h e f u l l s a m p l e 2 7 . I n a d d i t i o n , t h e 3 d a y c o m p o u n d r e t u r n s a r e a l s o s t a t i s t i c a l l y s i g n i f i c a n t a t t h e 5% l e v e l a t - 3 . 3 % ( t = - 3 . 5 7 ) a n d - 3 % ( t = - 3 . 0 4 ) . T h e p r e v i o u s r e s u l t s w e r e o n l y s i g n i f i c a n t a t t h e 10% s i g n i f i c a n c e t e s t l e v e l . T a b l e 6 c o n t a i n s a s u m m a r y o f t h e r e s u l t s o f t h e t e s t s f o r t h e 10 f i r m s . 6 .4 I N T E R P R E T A T I O N O F R E S U L T S T h e s t o c k h o l d e r i n t e r e s t h y p o t h e s i s p r e d i c t s t h a t a n a n t i g r e e n m a i l c h a r t e r a m e n d m e n t i s i n t h e s t o c k h o l d e r s ' i n t e r e s t . T h e r e f o r e t h e m a r k e t i s e x p e c t e d t o r e a c t p o s i t i v e l y t o n e w s o f a n a n t i g r e e n m a i l p r o p o s a l . T h e e m p i r i c a l r e s u l t s d o n o t s e e m t o s u p p o r t t h a t h y p o t h e s i s . On a v e r a g e , t h e m a r k e t r e a c t e d n e g a t i v e l y t o t h e n e w s . T h e r e s u l t s a r e g e n e r a l l y c o n s i s t e n t a c r o s s e i t h e r t e s t s i n v o l v i n g 31 f i r m s o r 10 f i r m s . S h a r e h o l d e r s s e e m t o h a v e i n c u r r e d a l o s s i n t h e v a l u e o f t h e i r h o l d i n g . F o r t h e t w e l v e d a y p e r i o d l e a d i n g u p t o t h e d a y a f t e r t h e p r o x y w a s m a i l e d , t h e v a r i o u s m e t h o d s a v e r a g e d 5 5 o b s e r v a t i o n s ( 7 5 % ) o f n e g a t i v e e x c e s s r e t u r n s o u t o f t h e t o t a l n u m b e r o f o b s e r v a t i o n s . T h e m e a n c u m u l a t i v e a v e r a g e a b n o r m a l r e t u r n f o r - 1 0 t o +1 i s - 2 . 5 % . T h e m a r k e t m a y h a v e b e e n a n t i c i p a t i n g t h e c o n t e n t s a n d d i s t r i b u t i o n o f p r o x y 2 7 T h i s c o u l d p o s s i b l y b e d u e t o t h e s m a l l e r s a m p l e . R e s u l t s s h o u l d b e i n t e r p r e t e d w i t h c a u t i o n . Table 6 46 Comparative s t a t i s t i c s for the sample of 10 firms under the market Event day Method 1 Method 3 0, + 1 -.019** -.018**-(-2.55) (-2.35) -1 to +1 -.033** -.029** (-3.57) (-3.04) -1 to +5 -.0225 -.0206 (-0.59) (-0.54) -1 to +10 -.0337 -.0324 (-0.74) (-0.49) -10 to +1 -.037* -.0308 (-2.05) (-1.63) -10 to +10 -.0370 -.0335 (-1.54) (-1.34) -30 to +30 -.0233 -.022 (-0.56) (-0.51 ) Standard Deviation 0.0054 0.0055 * S i g n i f i c a n t at the 10% l e v e l . ** S i g n i f i c a n t at the 5% l e v e l . 47 statements. I t cannot be a s c e r t a i n e d whether the market was a n t i c i p a t i n g the a n t i g r e e n m a i l p r o p o s a l , the a n t i t a k e o v e r p r o p o s a l s or a combination of both. Perhaps the very act of proposing amendments to the f i r m ' s c h a r t e r i s i n t e r p r e t e d as bad news. The negative excess r e t u r n s f o r the 31 f i r m s around event day 0 and +1 may not give any i n d i c a t i o n of the impact of an a n t i g r e e n m a i l proposal a l o n e . The mean r e t u r n across the 4 methods in Table 3 i s only -0.66%. R e s u l t s from r e s t r i c t i n g the sample to firms that d i d not have a n t i t a k e o v e r amendments proposed i n the same proxy statement showed the mean 2 day compounded r e t u r n ( f o r the 2 methods) f o r the 10 f i r m s to be -1.9%. T h i s i s a l o s s of n e a r l y one and a h a l f percent g r e a t e r than that averaged by the f u l l e r sample. Given t h i s evidence, we may i n f e r that c h a r t e r amendments are u s u a l l y not f a v o u r a b l y r e c e i v e d and when the market r e c e i v e s c o n f i r m a t i o n i n the form of a proxy statement, there i s a f u r t h e r adverse e f f e c t on stock p r i c e s . Focusing on the reduced sample, an a n t i g r e e n m a i l p r o p o s a l does not seem to be made with the i n t e r e s t of the s h a r e h o l d e r s i n mind and i s t h e r e f o r e i n c o n s i s t e n t with the s t o c k h o l d e r i n t e r e s t h y p o t h e s i s . For the event p e r i o d +2 through +10, there were 25 i n s t a n c e s of negative excess r e t u r n s . T h i s represented 46% of the t o t a l number of excess r e t u r n s across the v a r i o u s methods r e p o r t e d f o r that p e r i o d . T h i s randomness suggests 48 that the market had re a c t e d completely to the news by the day a f t e r the proxy was mailed or i t has re a c t e d p a r t i a l l y and i s w a i t i n g f o r more s i g n a l s i n the form of the sha r e h o l d e r s ' f i n a l a p p r o v a l . T h i s i s addressed i n a l a t e r p a r t . 6.4.1 THE CONFOUNDING EFFECTS The a v a i l a b l e evidence on the impact of a n t i t a k e o v e r c h a r t e r amendments on stock p r i c e s are mixed. DeAngelo and Rice (83) found such amendments to have a negative e f f e c t on stock p r i c e s although i t i s s t a t i s t i c a l l y i n s i g n i f i c a n t . L i n n and McConnell (83) a l s o examined the e f f e c t s of a n t i t a k e o v e r c h a r t e r amendments on shareholders' wealth. In c o n t r a s t , t h e i r o v e r a l l f i n d i n g i n d i c a t e s a s l i g h t l y p o s i t i v e r e t u r n f o r the average f i r m proposing these amendments. The s i g n i f i c a n c e of t h e i r r e s u l t s v a r i e d depending on the event p e r i o d measured. In t h i s paper, f i r m s that proposed both an a n t i g r e e n m a i l amendment and a n t i t a k e o v e r amendments were i s o l a t e d . The s t a t i s t i c a l r e s u l t s f o r the 21 firms are i n Table 7. The r e s u l t s are ambiguous. For some event p e r i o d s , the r e t u r n s c o u l d be negative or p o s i t i v e depending on the method chosen. In a d d i t i o n , none of the r e t u r n s are s i g n i f i c a n t l y d i f f e r e n t from zero. The l a c k of a dominant e f f e c t i n Table 7 leaves us with no d e f i n i t e c o n c l u s i o n s about the combined e f f e c t s of a n t i t a k e o v e r and a n t i g r e e n m a i l amendments on the average Table 7 Comparative s t a t i s t i c s for 21 firms that proposed both antigreenmail and antitakeover amendments.. Method 1 Method 0, +1 -.0023 -.0043 (-0..39) (-0.71) -1 to +1 -.0058 -.0012 (-0.81) (-0.16) -1 to +5 .0057 .0055 (0.52) (0.50) -1 to +10 . .0005 -.0008 (0.04) (-0.05) -10 to +10 -.0059 -.0169 (-0.31) (-0.86) -30 to +30 -.0389 -.0489 (-1.22) (-1.48) 50 f i r m . T h u s , t h i s p a p e r f i n d s n e i t h e r s u p p o r t n o r e v i d e n c e t o r e f u t e p r e v i o u s e m p i r i c a l s t u d i e s on a n t i t a k e o v e r c h a r t e r a m e n d m e n t s . 6.5 CHANGING EVENT DAY 0 Of t h e 31 f i r m s , r e p o r t s by t h e WSJI t h a t a n t i g r e e n m a i l c h a r t e r amendmen t s h a d b e e n p r o p o s e d o r a l r e a d y a p p r o v e d by s h a r e h o l d e r s w e r e made o n l y f o r 28 f i r m s . U s i n g t h e d a t e t h a t t h e WSJI r e p o r t e d t h e news a s t h e f i r s t p u b l i c l y a v a i l a b l e news d a t e d i d n o t p r o d u c e a n y s i g n i f i c a n t r e s u l t s . The e n t i r e p r o c e d u r e was r e p l i c a t e d f o r t h e f i r s t 28 f i r m s a n d t h e n f o r t h e s a m p l e o f f i r m s t h a t was i d e n t i f i e d p r e v i o u s l y a s t h e " r e d u c e d s a m p l e " . T h i s t i m e , t h e r e d u c e d s a m p l e h a d o n l y 7 f i r m s . T a b l e 8 c o n t a i n s a summary o f t h e s t a t i s t i c a l t e s t s . The a b n o r m a l r e t u r n s a r e s t a t i s t i c a l l y i n s i g n i f i c a n t r e g a r d l e s s o f t h e m e t h o d o f m e a s u r e m e n t o r t h e e v e n t p e r i o d . I t i s r e a s o n a b l e t o c o n c l u d e t h a t w h a t e v e r e f f e c t s t h e p r o p o s a l may h a v e , t h e y a r e p r o b a b l y i m p o u n d e d i n t h e s t o c k p r i c e s . T h i s c o u l d p o s s i b l y e x p l a i n why no s i g n i f i c a n t r e s u l t s w e r e f o u n d when e v e n t d a y 0 was r e d e f i n e d a s t h e f i r s t a n n o u n c e m e n t d a t e n o t e d i n t h e WSJI a n d t h a t t h e c u m u l a t i v e r e t u r n s w e r e i n s i g n i f i c a n t a f t e r e v e n t d a y +2 i n t h e i n i t i a l t e s t s . 51 Table 8 Designating the f i r s t , news date in the Wall Street Journal Index as event day 0. Results for the f u l l sample and for the reduced sample, t s t a t i s t i c s are within the parentheses. 31 firms 7 firms Method 1 2 3 1 3 Event day 0, + 1 .0087* .0077 .0075 .0043 .0015 (1.72) (1.48) (1.41) (0.57) (0.20) -1 to +1 .0070 .0052 .0051 .0027 .0009 (1.14) (0.81 ) (0.79) (0.30) (0.10) -10 to +1 .0156 .0040 .0062 .016 .0098 (0.98) (0.33) (0.50) (0.94) (0.54) -10 to +10. .02 .008 (0.83) (0.34) -30 to +30 .031 .0334 (0./74) (0.78) * S i g n i f i c a n t at the 10% level.. ** S i g n i f i c a n t at the 5% l e v e l . 52 6.6 VOTING FOR ANTIGREENMAIL AMENDMENTS The r e s u l t s i n t h i s paper suggest that an a n t i g r e e n m a i l amendment i s a p r o p o s i t i o n that reduces shareholders' wealth. Yet, an overwhelming m a j o r i t y of the firms d i d r e c e i v e t h e i r s h a r e h o l d e r s ' approval on adopting an a n t i g r e e n m a i l c h a r t e r . DeAngelo and Rice o f f e r e d s e v e r a l p l a u s i b l e e x p l a n a t i o n s . One i s simply that s t o c k h o l d e r s are i r r a t i o n a l . As noted by the authors themselves, t h i s assumption i s i n c o n s i s t e n t with the s t a t i s t i c a l t e s t s which assumes that i n v e s t o r s behave r a t i o n a l l y and the market i s at l e a s t semi-strong e f f i c i e n t . The second e x p l a n a t i o n suggests that s t o c k h o l d e r s recognize the negative impact that an a n t i g r e e n m a i l amendment has but s t i l l vote f o r i t s passage in order to maintain a working r e l a t i o n s h i p with management. The long term b e n e f i t s of m a i n t a i n i n g a " f r i e n d l y " r e l a t i o n s h i p with management i s deemed to outweigh the negative e f f e c t s of the a n t i g r e e n m a i l p r o p o s a l . The t h i r d e x p l a n a t i o n assumes that a r e l a t i v e l y small number of informed i n v e s t o r s r e a l i z e the u n d e s i r a b l e i m p l i c a t i o n s of an a n t i g r e e n m a i l p r o p o s a l and vote i n accordance with maximizing t h e i r wealth. However, there are numerous other uninformed i n v e s t o r s who are assumed to have been v o t i n g i n favour of previous p r o p o s a l s put f o r t h by management. T h i s p a r t i c u l a r group of shareholders are f u r t h e r assumed to vote i n a manner c o n s i s t e n t with past 5 3 behaviour. DeAngelo and Rice hypothesizes that the c o s t f o r the few informed i n v e s t o r s to stage a proxy f i g h t i s p r o h i b i t i v e and i s r e s t r i c t e d to cases where the d e t r i m e n t a l e f f e c t s i s assessed to be more than the expected cost of s o l i c i t i n g the votes of the uninformed i n v e s t o r s . The i n t e r e s t i n g q u e s t i o n i s why would management even propose an a n t i g r e e n m a i l amendment. Would fi r m s that have a prev i o u s c o n t r o l q u e s t i o n be more l i k e l y to recommend an a n t i g r e e n m a i l c h a r t e r ? Are t i g h t l y h e l d firms or widely h e l d f i rms more i n c l i n e d to propose such an amendment ? 6.6.1 FIRM CHARACTERISTICS Of the 31 firms i n the sample only M a r t i n M a r i e t t a had any kind of c o n t r o l q u e s t i o n over the 3 years before the a n t i g r e e n m a i l p r o p o s a l 2 8 . The takeover b i d by Bendix was p r o t r a c t e d and complicated by the entrance of two other f i r m s . M a r t i n M a r i e t t a countered by making a b i d f o r Bendix. Then United Technologies made a b i d f o r Bendix. E v e n t u a l l y A l l i e d C o r p o r a t i o n captured Bendix and the b a t t l e f o r M a r t i n M a r i e t t a ended. Aside from that one case, we can reasonably conclude that p r e v i o u s attempted takeovers do not seem to have a s i g n i f i c a n t i n f l u e n c e over a f i r m ' s d e c i s i o n to propose an a n t i g r e e n m a i l amendment. Perhaps i t i s the absence of takeover attempts or the presence of takeovers amongst firms 2 8 The WSJI was scanned f o r any mention of a takeover b i d between 1982 and 1985. 54 w i t h i n the same i n d u s t r y that prompted management to propose an a n t i g r e e n m a i l c h a r t e r . T h i s i s addressed i n the next p a r t . A f i r m ' s ownership s t r u c t u r e s i m i l a r l y f a i l e d to uncover any dominant p a t t e r n f o r the sample f i r m s . Seventeen of the firms i n the f u l l sample are widely h e l d to the extent that no one st o c k h o l d e r had more than 5% of the out s t a n d i n g v o t i n g s t o c k 2 9 . Only 3 companies had i n d i v i d u a l s owning more than 5% but l e s s than 10% of the fir m ' s v o t i n g stock. Whereas 11 of the f i r m s have between 5% and 19% of t h e i r v o t i n g stock i n the hands of e i t h e r other c o r p o r a t i o n s , t h e i r own o f f i c e r s and d i r e c t o r s or the f i r m ' s p r o f i t s h a r i n g p l a n . Thus, n e i t h e r the f i r m ' s p r e v i o u s takeover h i s t o r y nor i t s ownership s t r u c t u r e has provided any c l e a r i n d i c a t i o n of a f i r m ' s l i k e l i n e s s to propose an a n t i g r e e n m a i l c h a r t e r . T a b u l a t i n g the f i r m s ' Standard I n d u s t r i a l C l a s s i f i c a t i o n codes a l s o f a i l e d to r e v e a l any predominent p a t t e r n . The only s i g n i f i c a n t c o n c e n t r a t i o n s were, - Chemical and A l l i e d p r o d u c t i o n , 6 f i r m s . - Machinery except e l e c t r i c a l , 4 f i r m s . - E l e c t r i c a l and e l e c t r o n i c s machinery, equipment and s u p p l i e s , 6 f i r m s . Thus i t seems that the d e c i s i o n by management to propose an a n t i g r e e n m a i l amendment i s independent of the f i r m ' s ownership s t r u c t u r e and p r i o r takeover h i s t o r y . 2 9 Standard C o r p o r a t i o n D e s c r i p t i o n , J u l y 1986. 55 6.6.2 TAKEOVERS WITHIN INDUSTRIES The frequency of takeovers w i t h i n a s p e c i f i c i n d u s t r y was examined to determined i f there i s a p l a u s i b l e l i n k between the number of takeovers and the number of firms proposing a n t i g r e e n m a i l c h a r t e r s . Table 9 c l a s s i f i e s the sample firms i n t o the f i r s t 2 d i g i t s of the SIC code. The sample c o r r e l a t i o n c o e f f i c i e n t of 0.6 between the number of sample firms w i t h i n a given SIC code and the mean number of i n d u s t r y takeovers should be i n t e r p r e t e d with c a u t i o n . The mean number of i n d u s t r y takeovers should be ev a l u a t e d r e l a t i v e to the number of firms w i t h i n that i n d u s t r y . That r a t i o i s shown i n the l a s t column of Table 9. The sample c o r r e l a t i o n c o e f f i c i e n t between the number of firms that proposed a n t i g r e e n m a i l c h a r t e r s and the r a t i o i s -0.02. We may reasonably conclude that takeover a c t i v i t i e s w i t h i n the i n d u s t r y do not seem to be a f a c t o r i n a f i r m ' s d e c i s i o n to propose an a n t i g r e e n m a i l c h a r t e r . Table 9 56 C a t e g o r i z a t i o n of the sample f i i d i g i t s of the SIC code t o g e t h e r t a k e o v e r s e x p e r i e n c e d w i t h i n th< th r e e y e a r s . Takeovers i n v o l v e exceeding $1m o n l y . A c t u a l Number- of SIC Sample i n d u s t r y t a k e o v e r s code f i r m s '82 * 83 '84 10 1 10 3 3 12 1 3 4 5 13 1 76 78 90 15 1 23 23 46 20 1 68 54 44 22 1 25 14 16 23 1 17 24- 26 28 6 59 58: 89 29 2 4 6. 5 31 1 3 6 6 33 1 31 36 33 35 4 124 140 142 36 6 95 1 15 135 37 2 39 23 50 38 1 69 99 86 67 1 118 125 145 31 1960 2125 2558 ms i n t o the f i r s t two with the frequency of ca t e g o r y over the l a s t US f i r m s and i n amounts R a t i o - Mean : T o t a l number of f i r m s Mean w i t h i n SIC code 5.3 0.005 4 0.019 81 .3 0.043 30.7 0.017 55.3 0.017 18.3 0.011 22.3 0.011 68.7 0.018 5 0.009 5 0.008 33.3 0.012 135.3 0.015 115 0.021 37.3 0.017 84.7 0.029 129.3 0.038 C o r r e l a t i o n m a t r i x of sample f i r m s , mean number of i n d u s t r y t a keovers and. the r a t i o of the mean t o the t o t a l number of f i r m s i n the SIC code. SAMPLE MEAN RATIO SAMPLE 1.0000 MEAN 0.6446 1.0000 RATIO -0.0211 0.1556 1.0000 7. CONCLUSIONS The data i n t h i s paper represent firms that have proposed a n t i g r e e n m a i l c h a r t e r amendments. When these p r o p o s a l s a c t u a l l y become law, i t w i l l l e g a l l y p r o h i b i t management from engaging i n greenmail without shareholder a p p r o v a l . An attempt to i d e n t i f y c e r t a i n f i r m c h a r a c t e r i s t i c s that are common to the sample firms f a i l e d to r e v e a l any t e l l i n g p a t t e r n s . Neither a f i r m ' s ownership s t r u c t u r e , i t s previous c o n t r o l problems nor the predominance of takeovers w i t h i n a fi r m ' s i n d u s t r y seems to predispose a f i r m to propose such an amendment. Yet, a n t i g r e e n m a i l amendments are proposed by management and passed by s t o c k h o l d e r s . The qu e s t i o n of why s t o c k h o l d e r s vote i n favour of the p r o p o s a l i s s t i l l u n c l e a r . The s t o c k h o l d e r i n t e r e s t hypothesis p r e d i c t s that such p r o p o s a l s are b e n e f i c i a l to s h a r e h o l d e r s . The l o s s of an e f f e c t i v e t a c t i c f o r fending o f f takeover t h r e a t s means that management i s more v u l n e r a b l e to being r e p l a c e d . T h i s i n turn would encourage management to pursue more c l o s e l y a p o l i c y of value maximization and to keep i t s p e r q u i s i t e consumption w i t h i n a reasonable amount. A l s o , s i n c e t a r g e t management i s l e s s a b l e to e l i m i n a t e a takeover b i d , t a r g e t s h a r e h o l d e r s w i l l stand to gain from the premium that i s o f t e n a s s o c i a t e d with takeovers. The s t a t i s t i c a l a n a l y s es i n d i c a t e that such p r o p o s a l s are on average a s s o c i a t e d with stock p r i c e d e c l i n e s . The impact of the a n t i g r e e n m a i l proposal on sha r e h o l d e r s ' wealth 57 58 over the day that the market r e c e i v e s the news and the day a f t e r i s a s t a t i s t i c a l l y s i g n i f i c a n t average of -1.9% f o r the sample of firms that d i d not propose a n t i t a k e o v e r amendments in the same proxy statement. The o r i g i n a l sample of 31 fi r m s a l s o produced negative r e t u r n s over the same p e r i o d but the average of -0.66% i s not s t a t i s t i c a l l y s i g n i f i c a n t . T h i s evidence i s i n c o n s i s t e n t with the st o c k h o l d e r i n t e r e s t h y p o t h e s i s . Stockholders do not seem to b e n e f i t from management proposing an a n t i g r e e n m a i l c h a r t e r amendment. Nor do the managers as the proposal to v o l u n t a r i l y r e s t r i c t themselves h a r d l y seems to be s e l f - s e r v i n g . The negative r e a c t i o n s cannot be e x p l a i n e d by the hypo t h e s i s presented i n t h i s paper. The r e s u l t s are a l s o i n c o n s i s t e n t with that of Bradley and Wakeman, Dann and DeAngelo and Mikkelson and Ruback. These authors found evidence to suggest that t a r g e t e d repurchases and s t a n d s t i l l agreements are measures taken by t a r g e t management to f u r t h e r entrench themselves and t h e r e f o r e , one would expect measures to e l i m i n a t e these a c t i o n s to b e n e f i t s h a r e h o l d e r s . However, we found that the evidence i s n e i t h e r c o n s i s t e n t with the stoc k h o l d e r i n t e r e s t h y p othesis nor with the evidence of Bradley and Wakeman. In other words, the nega t i v e r e t u r n s documented i n t h i s paper are an anomaly which pres e n t s an i n t e r e s t i n g and c h a l l e n g i n g t o p i c f o r f u t u r e r e s e a r c h . APPENDIX 1 Firms i d e n t i f i e d by Mergers and Acquisitions as having proposed a n t i g r e e n m a i l c h a r t e r amendments. The p e r i o d covered i s from September 1984 to September 1985. The f i n a l sample i s in the l e f t column. The dates are that of the proxy statement. Acme E l e c t r i c Corp (85/9/16) Aluminum Co America (85/3/27) American P r e s i d e n t Co (85/4/1) Apache Corp (85/4/10) Bank Bldg and Equip (85/1/14) B e l l I n d u s t r i e s (85/9/18) B u r l i n g t o n Indus (85/1/7) Cheesebrough Ponds (85/3/26) Dover Corp (85/3/18) Dresser Indus (85/2/15) Eastern Gas and Fuel (85/3/18) Fleetwood Ent (85/7/18) Gould Inc (85/3/23) H a r r i s Corp (85/9/24) I n t e r c o Inc (85/5/17) I n t ' l Min and Chem (84/9/6) I n t ' l M u l t i f o o d s Corp (85/5/10) Kerr McGee (85/4/15) L u b r i z o l (85/3/18) MSI Data Corp (85/7/17) Mart i n M a r i e t t a (85/3/21) Merck and Co (85/3/20) NBI Inc (85/9/20) NCR Corp (85/2/22) Perkin Elmer (84/10/22) Singer (85/3/28) S t e r l i n g Drug (85/3/14) Sun Co (85/4/4) Thomas and Be t t s (85/3/18) Univar Corp (85/6/28) Warnaco (85/3/26) Ameriwest F i n a n c i a l Corp A t l a n t i c R i c h f i e l d Bausch and Lomb Borden C o n t i n e n t a l Information Cross and Trecker Fay Drug Fortune F i n a n c i a l Goodrich B F Heck's Inc In f o r m a t i c s General KDI Corp Mobil Corp Quixote Corp Ral s t o n Purina Sanders Assoc 59 APPENDIX 1A R e s u l t s of the r e g r e s s i o n s f o r e s t a b l i s h i n g a fir m ' s parameters, (t s t a t i s t i c s are i n the parentheses.) FIRM ALPHA BETA R-SQUARED ACE 0.0000 (-0.786) 0 .3658 (1 .858) 0.0135 AA 0.0000 (0.274) 1 .6623 (9.98) 0.2828 APS 0.0001 (1.406) 1 .8722 (9.10) 0.2427 APA 0.0000 (0.427) 1 .231 7 (5.81 ) 0.1142 BB -0 .0000 (-0.716) 0 .6340 (2.73) 0.0247 BI -0.0001 (-1 .420) 0 .6097 (4.405) 0.0676 BUR -0 .0000 (-0.408) 1 . 1 336 (5.641) 0.1082 CBM -0 .0000 (-0.362) 0 .4499 (3.761) 0.0492 DOV 0.0000 (0.266) 1 .0342 (5.58) 0.1061 DI 0.0000 (0.619) 1 .3378 (7.299) 0.1707 EFU 0.0000 (0.681 ) 0 .9451 (4.649) 0.0751 FLE -0.0001 (-0.871 ) 2 .650 (11.50) 0.3248 GLD -0 .0000 (-0.809) 1 .8405 (9.517) 0.2607 HRS -0.0001 (-1.197) 1 .2885 (7.663) 0.1852 ISS -0 .0000 (-0.666) 0 .7463 (6.742) 0.1490 IGL -0 .0000 (-0.609) 0 .5482 (3.429) 0.0406 IMC -0 .0000 (-0.468) 0 .9574 (5.871 ) 0.1164 KDI 0.0001 (1 . 123) 0 .9635 (3.672) 0.0469 LZ 0.0000 (0.281) 0 .9938 (4.926) 0.0839 MSI -0.0001 (-0.960) 1 .4525 (6.512) 0.1402 ML 0.0000 (0.164) 1 .3853 (8.803) 0.2315 MRK 0.0000 (0.702) 0 .9861 (8.506) 0.2193 NBI -0.0001 (-0.658) 1 .9951 (6.606) 0.1437 NCR -0 .0000 (-0.068) 1 .1714 (8.100) 0.2028 PKN -0 .0000 (-0.114) 2 .0938 (8.207) 0.2071 SMF -0 .0000 (-0.171 ) 1 .41 44 (6.429) 0. 1370 STY 0.0000 (0.402) 0 .8080 (6.515) 0.1403 SUN 0.0001 ( 1.134) 1 .3489 (6.412) 0.1364 TNB 0.0000 (0.316) 0 .8525 (6.744) 0.1490 UVX 0.0000 (0.656) 0 .8201 (4.371) 0.0666 WRC 0.0000 (0.323) 1 .3612 (5.989) 0.1207 60 APPENDIX 2 Average abnormal r e t u r n s and cumulative abnormal r e t u r n s f o r event p e r i o d 10 days before to 10 days a f t e r the f i r s t p u b l i c l y a v a i l a b l e news date of an a n t i g r e e n m a i l p r o p o s a l . The parameters and r e t u r n s were c a l c u l a t e d using a value weighted market index. The abnormal r e t u r n s were c a l c u l a t e d as the r e a l i z e d r e t u r n minus the market model r e t u r n using a value weighted market index. Event Day AAR t CAAR t -10 -.0035 -0.94 -.0035 -0.94 -9 -.0008 -0.22 -.0043 -0.81 -8 -.0015 -0.41 -.0058 -0.89 -7 -.0047 -1 .26 -.0105 -1 .39 -6 .0016 0.43 -.0089 -1 .06 -5 -.0009 -0.24 -.0098 -1 .07 -4 -.0008 -0.22 -.0106 -1 .06 -3 -.0044 -1.18 -.0150 -1 .42 -2 .0025 0.65 -.0125 -1.11 -1 -.0018 -0.49 -.0133 -1.12 0 -.0037 -0.99 -.0170 -1 .42 1 -.0033 -0.90 -.0204 -1 .57 2 .0011 0.29 -.0193 -1 .43 3 .0032 0.86 -.0161 -1.14 4 .0017 0.44 -.0144 -0.99 5 .0013 0.35 -.0131 -0.87 6 -.0006 -0.16 -.0137 -0.88 7 -.0030 -0.80 -.0167 -1 .04 8 .0019 0.51 -.0148 -0.90 9 -.0025 -0.67 -.0173 -1 .08 10 -.0023 -0.62 -.0196 -1.14 * S i g n i f i c a n t at 10% l e v e l . ** S i g n i f i c a n t at 5% l e v e l . 61 APPENDIX 4 Average abnormal r e t u r n s and cumulative abnormal r e t u r n s f o r event p e r i o d 10 days before to 10 days a f t e r the f i r s t p u b l i c l y a v a i l a b l e news date of an a n t i g r e e n m a i l p r o p o s a l . The abnormal r e t u r n s are c a l c u l a t e d as the a c t u a l r e a l i z e d r e t u r n s minus the r e t u r n on a equal weighted market index. Event Day AAR t CAAR t -10 -.0029 -0.78 -.0029 -0.78 -9 -.0016 -0.43 -.0045 -0.90 -8 .0000 0.00 -.0045 -0.71 -7 -.0042 -1.16 -.0087 -1.19 -6 .0006 0.16 -.0081 -1 .00 -5 -.0009 -0.26 -.0090 -1.01 -4 -.0016 -0.46 -.0106 -1.10 -3 -.0044 -1.21 -.0150 -1 .46 -2 .001 3 0.37 -.0137 -1 .25 - 1 -.0030 -0.82 -.0167 -1 .44 0 -.0037 -1 .02 -.0204 -1.68* 1 -.0044 -1 .20 -.0248 -1.96** 2 .001 6 0.45 -.0232 -1.76* 3 .0045 1 .23 -.0187 -1.37* 4 .0008 0.21 -.0179 -1 .26 5 .0011 0.31 -.0168 -1.15 6 -.0016 -0.45 -.0184 -1 .23 7 -.0024 -0.65 -.0208 -1 .34 8 .0024 0.64 -.0184 -1.15 9 -.0021 -0.59 -.0163 -1 .00 10 -.0023 -0.62 -.0140 -0.83 * S i g n i f i c a n t at the 10% l e v e l . ** S i g n i f i c a n t at the 5% l e v e l . 63 APPENDIX 6 Average abnormal r e t u r n s and cumulative average abnormal r e t u r n s f o r event p e r i o d 10 days before to 10 days a f t e r the f i r s t p u b l i c l y a v a i l a b l e news of an a n t i g r e e n m a i l p r o p o s a l . The abnormal r e t u r n s were c a l c u l a t e d as the r e a l i z e d r e t u r n minus an average r e t u r n . Event day AAR t CAAR t -10 .0038 -0.49 -.0038 -0.49 -9 .0008 -0.11 -.0046 -0.46 -8 .0027 -0.35 -.0073 -0.56 -7 .0057 -0.74 -.0130 -0.66 -6 .0018 0.24 -.0112 -0.66 -5 .0006 -0.08 -.0118 -0.62 -4 .0008 -0.11 -.0126 -0.61 -3 .0052 -0.67 -.0178 -0.81 -2 . 0034 0.44 -.0144 -0.62 -1 .0011 -0.14 -.0155 -0.63 . 0 .0023 -0.29 -.0178 -0.71 1 .001 3 -0.17 -.0191 -0.73 2 .001 6 0.20 -.0175 -0.63 3 .0048 0.62 -.0127 -0.44 4 .0024 0.31 -.0103 -0.34 5 .0024 0.31 -.0079 -0.25 6 .0003 0.04 -.0076 -0.23 7 .0023 -0.30 -.0099 -0.30 8 .0023 0.30 -.0076 -0.24 9 .0010 -0.12 -.0086 -0.24 1 0 .0006 -0.08 -.0092 -0.25 S i g n i f i c a n t at the 10 % l e v e l . S i g n i f i c a n t at the 5% l e v e l . 65 o BIBLIOGRAPHY 1. A s q u i t h P, 1983, "Merger b i d s , u n c e r t a i n t y and stoc k h o l d e r r e t u r n s . " J o u r n a l of F i n a n c i a l Economics Vol.11. 2. 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