Successful turnaround targets for pension fund activism: The usefulness of financial indicators

This study investigates the usefulness of financial indicators in identifying target companies that can be successfully turned around by pension fund activism. Using a sample of companies targeted by five of the most active public pension funds from 1989 to 1996, I examine the following questions: (1) What types of inefficiencies are corrected with pension fund monitoring? (2) Are these inefficiency improvements value-enhancing? (3) Do pension funds select targets based on these inefficiencies? (4) Are financial indicators useful in identifying inefficiencies of turnaround targets and hence improving the target selection process? The results indicate that pension fund monitoring is positively associated with improvements in the indicators that proxy for inefficiencies associated with high asset growth and high labor growth, and more weakly, with improvements in the indicators that proxy for inefficiencies associated with over-diversification. However, except for the labor growth inefficiency indicator, the reductions in inefficiencies induced by their monitoring do not appear to be sufficient to generate large stock performance improvement. Further, I do not find evidence that pension funds select targets based on inefficiencies that they effectively correct ("correctable" inefficiencies), nor do they choose targets based on correctable inefficiencies that are value-enhancing. These findings serve to explain the null result on the value of pension fund monitoring documented in prior research. Finally, I find evidence that the inefficiency indicator on labor growth may be useful in enhancing pension funds' target selection process.