Proxy Contests, Shareholder Wealth and Operating Performance : An Analysis of the 1980s

Analysis of 187 proxy contests for board seats from the 1979-89 period indicates that the proxy mechanism made a significant contribution to corporate governance in the 1980s by overcoming obstacles to the market for corporate control, by inducing the removal of incumbent management, and by facilitating downsizing at the target companies. Firms that were acquired and/or that replaced senior management following proxy contests experienced a sustained appreciation in shareholder wealth. By contrast, firms that were not acquired or that did not replace senior management, even in cases where dissidents attained seats, suffered a decline in shareholder wealth following proxy contests. Operating income increases following proxy contests, a result which also holds after adjusting for an industry control sample. The post-contest change in operating income is positively related to the changes in shareholder wealth at contest announcement, indicating a direct linkage between valuation effects and corporate operating performance