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You are required to do three (3) things as an individual student for this Assignment:
- Choose & identify a relevant article for EACH of your two chosen Topics;
- Contribute a 500 word post to a Discussion Forum (DF) explaining the relevance of the article;
- Contribute a 500 word alternative view to one other student's contribution.
Thread: Goranova, M., Abouk, R., Nystrom, P.C. and Soofi, E.S., 2017. Corporate governance antecedents to shareholder activism: A zero‐inflated process. Strategic Management Journal, 38(2), pp.415-435.
Topic 5- Corporate Governance
Subtopic- Shareholder Activism
Relevance of Article
With the increased shareholder engagement, companies and its executives are expected to be more accountable. However, it has resulted in debates whether shareholder activism enhances corporate accountability or managerial short-termism. This article points out that corporate governance practices allow transparency and effective handling of shareholder demands and private activism.
In accordance with agency-based view, corporations that have well-established governance practices are expected to be highly responsive to shareholder activism. With the inclusion of principal costs, a broader model implies that shareholder activism would be minimal towards well-governed corporations and such corporations are likely to settle activist demand provided it is a value addition for the company and other shareholders. In this article the association between visible shareholder activism and incentive alignment and monitoring activities of the board and shareholders.
Based on the data obtained from a sample of 257 S&P500 companies, Goranova et al. (2017) have observed that larger companies experienced increased number of shareholder demand and lesser engagement in private activism. At the same time, companies with higher return on equity faced lesser shareholder activism. Companies with mature stock price encountered lesser shareholder activism. These results are consistent with the existing research findings (Goranova et al. 2017). Similar lower activism is likely to be encountered by companies under debt which acts as an agency problem. The outcome of this model is practically applicable in the strategy formulation process. Based on the evaluation of the probability of occurrence of shareholder activism and making private settlements, strategic decisions related to proxy vote expectations and whether to undertake private negotiations can be made.
It is obvious that corporate governance practices have to act as a constraint for agency issues and hence stimulate managers to be responsive to activists. Corporate governance offers a means to conduct transparent and open negotiation to avoid information asymmetry among shareholders. It is concluded that corporate governance practices play a critical role in shareholder activism.
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