Barber (2006)

Barber, Brad M. "Monitoring the Monitor: Evaluating CalPERS' Shareholder Activism." Working Paper, Graduate School of Management, UC Davis. March, 2006.

Evaluates the shareholder activism programs of CalPERS, the California Public Employees' Retirement System. Since 1992 CalPERS has published an annual focus list of companies it views as having remediable governance shortcomings.

The study evaluates the returns to CalPERS' activism using two techniques.

First, an event study analysis of 115 firms targeted by CalPERS from 1992 to 2005 finds that that CalPERS' activism "has resulted in total wealth creation of $3.1 billion between 1992 and 2005" on the day their membership on the Focus List was announced. Average returns were negative in only four of the 14 years studied. The mean equal-weighted return over the period was 23 bps (t-stat 2.09), and the value-weighted return was 35 bps (t-stat 1.51).

Second, a long-run analysis using a Carhart-type risk model (returns are explained by market risk, size, valuation, and momentum) "yields intriguing, but inconclusive results. Portfolios of focus list firms earn annualized abnormal returns ranging from 2.4 to 4.8 percentage points annually at holding periods ranging from 6 months to 5 years. If these abnormal returns are causally linked to the activism of CalPERS, the wealth creation is enormous -- as much as 20 time greater than the short-run benefits and as large as $89.5 billion through December 2005." The author notes, however, that the returns series is "simply too volatile" to draw the firm conclusion that the CalPERS governance program generates reliably positive long-term returns, and cites failure to adjust for this fact as a shortcoming of prior literature in the field.

The study also includes strong introductory material on the nature of shareholder relationships with corporate managements. It is a must-read for those who wish to learn more about the impact of corporate governance initiatives on firm valuation.

LK comment:  Strong paper.  Won 2006 Moskowitz Prize.  See also Barber (2010).

Link (working paper):  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=890321

Link (published version):  http://joi.iijournals.com/content/16/4/66