Behind the Scenes: The Corporate Governance Preferences of Institutional Investors --- McCahery, Sautner & Starks, 2016 Flashcards
In the paper Behind the Scenes: The Corporate Governance Preferences of Institutional Investors (2016), what two governance mechanisms are documented, and how are they viewed in relation to each other?
A) Voice and proxy advisory, viewed as competing mechanisms.
B) Exit and liquidity, viewed as complementary devices.
C) Voice and governance-motivated exit, viewed as complementary devices.
D) Proxy advisory and exit, viewed as independent mechanisms.
E) Voice and exit, viewed as mutually exclusive choices.
C
What challenge does the paper highlight regarding the analysis of the use of the ‘exit’ threat by institutional investors?
A) The challenge that the exit threat is by definition unobservable from the outside.
B) The difficulty in proving the effectiveness of the exit threat in bringing about changes in management behavior.
C) The complexity of investors’ varied responses to the exit threat.
D) The uncertainty about whether investors truly intend to exit or just threaten to do so.
E) The difficulty in tracking and documenting the exit threat due to the lack of transparency in institutional investor strategies.
A
SoftBank Pre-Story:
SoftBank Group Corp. is a Japanese conglomerate holding company founded by Masayoshi Son. Son has a greater than 25% stake in the conglomerate. The second-largest shareholding group owns only 5.3% of the shares. Other shareholders are mostly institutional investors. Last week, the activist hedge fund Elliott Management disclosed a $2.5bn stake in SoftBank.
Now assume that Elliott Management has already called for governance changes in SoftBank. What are the three possible determinants of the hedge fund’s voicing strategy, and what does the evidence suggest about their prevalence in Elliott Management’s case?
A) Liquidity, investor horizon, and size of the investor’s stake.
B) Ownership concentration, passive investor influence, and corporate debt level.
C) Market efficiency, regulatory constraints, and hedge fund compensation structure.
D) Media attention, firm size, and legal framework.
E) CEO compensation structure, government influence, and shareholder sentiment.
A
According to McCahery et al. (2016), how do institutional investors typically engage with companies?
A) By submitting formal shareholder proposals.
B) By engaging in behind-the-scenes negotiations before taking public action.
C) By conducting proxy battles to replace management.
D) By coordinating public campaigns against underperforming firms.
E) By threatening legal action as a first resort.
B
What percentage of institutional investors surveyed engaged in discussions with management?
A) 30%
B) 45%
C) 63%
D) 80%
E) 95%
C
What percentage of institutional investors sold shares due to dissatisfaction with corporate governance?
A) 12%
B) 29%
C) 39%
D) 51%
E) 62%
C
How does liquidity impact institutional investors’ likelihood of engagement?
A) Higher liquidity leads to less intervention, as investors can sell their shares more easily.
B) Higher liquidity leads to more engagement, as it allows for easier acquisition of large stakes.
C) Liquidity has no impact on engagement levels.
D) High liquidity discourages voice but encourages legal action.
E) Lower liquidity reduces institutional investor interest in governance.
A
Which of the following is a key impediment to shareholder activism?
A) Free-rider problems and legal restrictions on concerted action.
B) Excessive transparency in engagement strategies.
C) The lack of available institutional investors in global markets.
D) The inability of hedge funds to hold significant stakes.
E) A regulatory environment that mandates excessive activism.
A
What role do proxy advisors play in institutional governance?
A) They help institutional investors make informed voting decisions.
B) They directly engage with corporate management to enforce governance.
C) They act as intermediaries between hedge funds and portfolio companies.
D) They advocate for passive investment strategies.
E) They encourage firms to avoid engaging with activist shareholders.
A
What did the paper find regarding long-term investors and their likelihood to engage in governance?
A) They engage more often than short-term investors.
B) They engage less often than short-term investors.
C) They engage only when liquidity is low.
D) They rely on proxy advisors for all voting decisions.
E) They only intervene in firms where they hold more than 10% of shares.
A
What percentage of institutional investors use proxy advisors?
A) 30%
B) 45%
C) 60%
D) 75%
E) 90%
C
What was found regarding exit vs. voice strategies?
A) Investors use both as complementary governance mechanisms.
B) Investors strictly prefer exit over voice.
C) Voice and exit are mutually exclusive strategies.
D) Exit is only effective for hedge funds.
E) Voice is the dominant strategy for index funds.
A
