New evidence on the effectiveness of the proxy mechanism

The proxy fight literature to date has focused exclusively on proxy fights that progress to a shareholder vote or near-shareholder vote stage. In contrast, this paper uses a sampling methodology which retains all cases where a proxy fight is threatened, whether or not a vote eventually occurs. Less than one half of threatened proxy fights ultimately result in a shareholder vote. Votes are avoided in three-fourths of dropped contests when the target firm agrees to be acquired, reaches a settlement with the dissident, or restructures to the dissident' s satisfaction. These avoided contests are associated with significant increases in target firm value, comparable to the increases observed when contests end with a shareholder vote. The increases in firm value are found to be highly concentrated among firms which are acquired subsequent to a threatened proxy fight, providing evidence that the threat of a proxy fight is most effective as a means of forcing the sale of target firms.