Gillian and Starks
What are institutional investors
Institutional investors are equity holders in the US financial market (investment advisers investment companies, bank trust departments, insurance companies, foundations and pension funds) -> becoming active participants as they cannot just sell large share parts without making losses
What are the three impediments to shareholder activism
- inadequate monitoring due to free riding
- legal and institutional obstacles to activism
- incentive problems amongst institutional investors in the US
Name the 4 characteristics of hedge funds
(1) they are pooled, privately organised investment vehicles
(2) they are administered by professional investment managers who receive performance-based compensation and have significant investments in the fund
(3) they are not widely available to the public
(4) in the United States, they operate outside security regulation and registration requirements
What is the difference between active and passive voting?
Active voting is defined as funds independently assessing and evaluating the issues up for vote. Passive voting is defined as relying on proxy advisory recommendations.
true or false?
The investor with a larger stake in the firm has weaker incentives to undertake monitoring activities, as it isn't more likely that the large shareholder’s increased return from monitoring is sufficient to cover the costs
False
weaker -> stronger
Name the three different changes in the governance structure of target companies that HUKFF engages in
- restructuring of the operations of diversified firms
- replacing the CEO or the chairman
- the HUKFF seeks an increased cash payout to shareholders
Name 2 of the 4 hedge fund activists advantages
- hedge fund managers have greater incentives to generate positive returns than their counterparts at other institutions
- hedge funds may hold undiversified portfolios consisting of large block holdings in individual companies and may use leverage and derivatives—strategies that are prohibited for many institutional investors.
- hedge funds may require that investors agree to lock up their funds for periods of two years or longer, whereas mutual funds are required by law to sell securities within one day of an investor redemption request.
- hedge fund managers are unregulated and typically suffer fewer conflicts of interest than managers at other institutions.
What are “blanket recommendations”?
Trying to minimize costs by issuing blanket recommendations, where the ISS uniformly recommend for or against certain governance or compensation policies across all companies.
Voting against management “one-size-fits all approach”
What was the result of the research they did? (name one thing)
- Large amount of active engagement in private sector
- Engagements have a substantial effect on corporate activities
- Returns to activism are economically large and statistically significant
How does active voting affect the funds’ shareholders and the underlying firms?
The firms have higher alphas and actively voting funds mitigate the influence of ISS in ways that contribute positively to shareholder value.