1. Jim Hsieh (George Mason) Qinghai Wang (Georgia Tech) NTU, 12/11/2008

2. Corporations and Shareholders’ Rights  Public corporations are like republics: Shareholders elect directors who in turn manage the firms.  Under the US laws and regulations: Shareholders elect the directors, but have little control over most of corporate decisions. The board of directors is given the power to manage the company. The vast majority of corporate policies are made by the board of directors or by the management to whom the board has delegated authority. 2 NTU 20082

3. Shareholders and Corporate Governance  Mixed evidence on the effectiveness of corporate governance mechanisms. Board of directors Executive incentive compensation Large shareholders and institutional investors Market for corporate control  Recent scandals highlight failures of corporate governance.  Bebchuk: The case for increasing shareholder power.  Bainbridge: The case for limiting shareholder rights. 3 NTU 20083

4. Corporations and Shareholder Voting Rights  While shareholder voting rights are an integral part of corporate governance, shareholder control through voting is somewhat limited.  Shareholders have the rights to: Elect directors Approve extraordinary items, e.g., amendments of bylaws, voluntary dissolution, asset sales,... etc.  But, strangely, shareholder voting rights are not required in determining some of the important corporate decisions. 4 NTU 20084

5. Surprisingly, Not All Takeovers Need to Be Approved by Acquirer Shareholders  M&As are one of the largest corporate investments.  M&As affect shareholder wealth: Numerous studies have shown that many takeovers destroy shareholder value. ○ Travlos (1987), Bradley et al. (1988), Fuller et al. (2002), Moeller et al. (2004).  M&As are riddled with agency problems Acquiring-firm managers are rewarded thru takeovers even though shareholders are not. ○ Grinstein & Hribar (2004), Harford & Li (2007) 5 NTU 20085

6. Shareholder Voting Rights in M&As  Shareholder voting rights exist but differ: All M&As have to be approved by target shareholders. Acquirer shareholder voting rights can be bypassed.  The 20% Rule: No Vote  If newly issued shares to finance the deal < 20%. 6 NTU 20086

7. Objectives of This Study  Do shareholders value their voting rights?  Whether and how do shareholder voting rights and trading from mutual fund investors exert influence during the takeover process? Probability of deal completion 7 NTU 20087

8. Valuable Voting Right Hypothesis  If shareholders value their voting rights, we should observe a positive relation between their (net) trading and the presence of voting rights in acquisitions. 8 NTU 20088

9. Why Shareholders Value Their Voting Rights?  Shareholders (especially institutional investors) can exercise their voting rights to monitor managerial decision-making.  Voting from institutional investors is effective in constraining managerial behavior in some situations. Brickley et al. (1994); Bethel & Gillan (2002)  Shareholder proposals result in positive changes in firm value. Black (1992); Gordon & Pound (1993); Pozen (1994)  Firms adopting equity-based compensation plans without shareholder approval tend to suffer from LT poor performance. Balachandran et al. (2004) 9 NTU 20089

10. Why Shareholders Might Not Care About Voting Rights?  Shareholder proposals have no impact on firm value. Karpoff et al. (1996)  Shareholders’ votes on electing directors only result in marginal improvement in firm performance. Cai et al. (2008)  Burch et al. (2004): For mergers, if shareholders do vote, they tend to vote for the pending offers.  Conflicts of interest among shareholders: ○ Davis & Kim (2006): business ties ○ Matvos & Ostrovsky (2008): cross-holding 10 NTU 200810

11. Why Shareholders Might Not Care About Voting Rights?  Because they have another way of expressing their opinions – Exit by selling their shares.  Maug (1998) and Kahn & Winton (1998): Monitoring vs. Trading  Parrino et al. (2003) provide the first evidence of institutional investors “voting with their feet”.  Admati & Pfleiderer (2008): “Wall Street walk” is a credible threat of exit. 11 NTU 200811

12. Sample Selection  Sample of acquisitions: from SDC, 1990-2005  Classify acquisitions with and without shareholder voting rights: Search Form 8-K (Merger Agreement) and S-4 (Registration Statement), public announcements, and any public information  Mutual fund holdings from Thomson Financial and CRSP Mutual Fund Database  Only actively managed U.S. domestic equity funds  No – Sector funds, international funds, bond funds, index funds  Total 2,090 deals NTU 200812

13. Measuring Mutual Fund Trading  Raw Trade = (Buy – Sell)/ShrsOut  Net Trade = Raw Trade – Normal Trade  Normal Trade is estimated using two approaches: Portfolio approach: 27 characteristic-based portfolios by size, market-to-book, and momentum (3x3x3) Historical trading approach: Mean of mutual fund trading in the past two quarters prior to the announcement quarter NTU 200813

14. Mutual Fund Trading Patterns Before Announcement -- Table 2, Panel B.2 NTU 200814 CashNo-VoteVote Difference Between (N=526)(N=462)(N=1,102)Two Groups [1][2][3] [3] - [1][3] - [2] Raw Trades0.389***0.565***0.483***0.094-0.082 [0.103]***[0.153]***[0.165]***[0.062]*[0.012] Net Trades0.202**0.321***0.241***0.039-0.080 [0.030][0.019][0.010]***[-0.020][-0.009] * All figures are in percentage.

15. Mutual Fund Trading Patterns During Announcement Quarter -- Table 2, Panel B.1 NTU 200815 CashNo-VoteVote Difference Between (N=526)(N=462)(N=1,102)Two Groups [1][2][3] [3] - [1][3] - [2] Raw Trades0.394***0.0360.427***0.0330.391** [0.103]***[0.059][0.109]***[0.006][0.050]** Net Trades0.245*-0.1750.214**-0.0310.389** [0.075]*[-0.041][0.061]** [-0.014][0.102]** * All figures are in percentage.

16. Test The Valuable Voting Right Hypothesis – Table 4 NTU 200816 Dependent Variable: Mutual fund trades from the quarter ending before deal announcement to the quarter ending after announcement Sample: All DealsSample: Stock and Mixed Deals Only Raw TradesNet TradesRaw TradesNet TradesRaw TradesNet TradesRaw TradesNet Trades (1)(2)(3)(4)(5)(6)(7)(8) Voting Rights0.4420.4510.6590.6730.4000.4180.5550.572 (0.020)(0.016)(0.030)(0.025)(0.039)(0.029)(0.077)(0.065) Lag(Fund Holdings)-0.042-0.036-0.060-0.054-0.048-0.041-0.073-0.066 (0.000)(0.002)(0.000)(0.001) (0.002)(0.000)(0.001) Lag(Fund Trades)0.0990.0450.018-0.0080.0890.035-0.002-0.030 (0.109)(0.456)(0.825)(0.917)(0.212)(0.607)(0.982)(0.731) * P-values are in parentheses. * Other control variables are not reported here. Momentum1.5191.1951.3981.097 (0.000) Year Fixed EffectYes Nobs.2090 1307 1564 942 Adjusted R 2 0.0130.0100.0530.0390.0190.0160.0540.043

17. Test The Valuable Voting Right Hypothesis – Table 6 - Do Mutual Funds Trade Differently in Good vs. Bad Deals? NTU 200817 * P-values are in parentheses. * Other control variables are not reported here. Dependent Variable: Mutual fund trades from the quarter ending before deal announcement to the quarter ending before deal resolution Offer Quality is Defined by Acquirer ReturnsOffer Quality is Defined by Synergistic Gains Bad DealsGood DealsBad DealsGood Deals Raw TradesNet TradesRaw TradesNet TradesRaw TradesNet TradesRaw TradesNet Trades (1)(2)(3)(4)(5)(6)(7)(8) Voting Rights0.8430.8330.3960.3420.7840.7890.5610.527 (0.022) (0.411)(0.473)(0.076)(0.071)(0.155)(0.173) Lag(Fund Holdings)-0.059-0.054-0.061-0.055-0.068-0.062-0.048-0.044 (0.004)(0.008)(0.002)(0.006)(0.007)(0.014)(0.008)(0.013) Lag(Fund Trades)-0.002-0.027-0.016-0.033-0.064-0.0910.0360.026 (0.985)(0.775)(0.863)(0.740)(0.621)(0.463)(0.586)(0.715) Momentum1.5791.3100.9180.5411.8311.5520.8300.485 (0.000) (0.007)(0.106)(0.000) (0.001)(0.043) Year Fixed EffectYes Nobs.826 481 554 753 Adjusted R 2 0.0560.0470.0430.0190.0630.0520.0390.027

18. Joint Effect of Shareholder Voting Rights and Mutual Fund Trading on Probability of Success – Table 8 NTU 200818 Subsamples by Offer Quality Sample: All Takeover TransactionsBad DealsGood Deals (1)(2)(3)(4)(5)(6)(7)(8) Voting Rights-0.533-0.534-0.051-0.050-0.586-0.588-0.422-0.431 (0.008)(0.009)(0.002) (0.021) (0.231)(0.223) Raw Trades0.1090.0100.1180.088 (0.000)(0.002)(0.000)(0.007) Net Trades0.1060.0090.1210.075 (0.000)(0.003)(0.000)(0.019) (Voting Rights)x(Raw Trades)0.002 (0.560) (Voting Rights)x(Net Trades)0.003 (0.532) Nobs.2090 1339 751 Pseudo R 2 0.2840.2830.304 0.307 0.2570.256

19. Joint Effect of Shareholder Voting Rights and Mutual Fund Trading on Probability of Success – Summary  Both shareholder voting rights and mutual fund trading significantly affect the probability of deal completion. Deal success is influenced by mutual funds’ granted rights to “vote with their ballots” and their decisions to “vote with their feet”.  Results suggest that mutual funds’ decisions to vote with their feet are … Critical if shareholders do not have the rights to vote on proposed deals. Less important if shareholders have the voting rights. NTU 200819

20. Robustness Checks on the Relationship between Shareholder Voting Rights and Mutual Fund Trading 1) Use a variety of remedies to address two forms of endogeneity: reverse causality and omitted variables. 2) Control for other corporate governance mechanisms. 3) Use a new measure of normal mutual fund trading. 4) Control for mutual funds’ cross-holding effect. 5) Control for the impact of merger arbitrage on measuring mutual fund trading. NTU 200820

21. Conclusions: Do Mutual Fund Managers Value Shareholder Voting Rights?  Our results suggest: They care.  Our results support the valuable voting right hypothesis: Mutual fund trading is significantly higher in deals with shareholder voting rights. The difference in fund trading between deals with and without voting rights is even more striking when the transactions appear to reduce shareholder wealth.  We also conduct the first study that investigates the interaction between “voting with ballots” and “voting with feet” and their joint effect on the probability of deal completion. 21 NTU 200821