Shareholder Activism and Its Impact on Profitability, Return, and Valuation of the Firms in India

Abstract

The paper’s prime objective is to understand the impact of Shareholder activism on firm performance. This study is conducted in a unique setup where traditional activist investors such as pension funds and hedge funds are not present. However, the activism cases are increasing yearly in an emerging economy like India. We have created a comprehensive shareholder activism index (sha index) using multiple activisms and corporate governance factors. To measure firm performance, we have used valuation (Tobin’s Q and Market capitalization), profitability (operating profit margin and net profit margin), and return ratios (Return on capital and return on equity). Panel data analysis (PDA) is employed for the current study as it overcomes the shortcomings of the time series analysis and cross-sectional studies. The sample comprises 37 listed firms’ data for FY2017 to FY2020. Chosen firms have experienced activism instances at least once during the 2017–2020 period. As per our analysis, shareholder activism has a significant negative impact on valuation measured in market capitalization and profitability estimated by operating profit margin. Activism primarily impacts the other four parameters negatively, but it is insignificant. India is in the nascent stage of activism, partly explaining the insignificance of the effects of shareholder activism on firm performance. Also, activist investors are targeting companies. These attacks are not fructifying desired outcomes as promoters own over 50% stake in the listed companies. The latest data for FY2021 has not been considered for the study as covid-19 impacted the businesses during the financial year. Also, we cannot capture activism instances that are not reported in regulatory filings. Unlike past research in this area, we have used a comprehensive activism index as a proxy of activism and have employed PDA instead of event studies to assess the impact on firm performance. Also, this is the first such empirical study conducted in an emerging economy setup where neither large hedge nor pension funds are present.

The unfolding of shareholder activism in India: an exploratory study

“…Even though SA is a relatively new phenomenon in India, there is evidence that its prevalence is rising. Investigations into the impact of SA on the financial performance of the firm suggest that there is no significant difference between the financial performance of firms subjected to SA and firms not subjected to SA in the year of incidence, which is in concurrence with the previous studies (Shingade et al , 2022a, 2022b). However, in the succeeding years ( t +1 and t +2 ) a significant difference in financial performance was found to exist.…”

“…Existing research in the area of SA in India suggests that SA has gained momentum over the past decade (Shingade et al, 2022a(Shingade et al, , 2022bIslam et al, 2020;Islam, 2020), and there has been a significant increase in the number of proposals rejected by shareholders since the implementation of various regulatory and policy reforms (Shingade et al, 2022a(Shingade et al, , 2022b Investigations into the impact of SA on the firm-level variables in India revealed a significant increase in the performance of the firm post-SA (Islam, 2020). However, a shred of contrasting evidence has also been proposed, suggesting that there is no significant impact of SA on performance measures, including valuation, profitability, margins and return results (Shingade et al, 2022a(Shingade et al, , 2022b. Further investigations into the impact of SA on corporate governance quality revealed a significant positive impact of SA on improving corporate governance quality (Bhandari and Arora, 2016).…”

“… WL = Wahal (1996); GGIS = Gam et al (2021); KZ: Klein and Zur (2009); ACSS = Alexander et al (2010); BG = Butler and Gurun (2012); NOS = Norli et al (2015); EP = Elise Perrault (2015); BBJ = Bebchuk et al (2015); MW = Marquardt and Wiedman (2016); BJMT = Brav et al (2018); GLMW = Guo et al (2019); CL = Corum and Levit (2019); RS = Rao and Sivakumar (1999); GKM = Gillan et al (2000); BR = Barber (2007); Shingade et al (2022b)…”

Shareholder Activism and Firm Performance: A Review

“…The information demonstrates that advocacy has minimal effect on the efficiency rankings of Brazilian-listed companies. According to the research, estimations of profitability for operational profit margin and market worth are dramatically reduced as a result of shareholder activism (Shingade, Rastogi, Bhimavarapu, & Chirputkar, 2022).…”

Dividend Policy in Firms Listed at the Nairobi Securities Market: Does Shareholder Activism Matter?

“…The CEOs of the companies are keen to keep their jobs and do everything possible to design dividend policies in line with shareholders' needs (Kilincarslan & Ozdemir, 2018). Shingade et al (2022) studied shareholder activism and its impact on the profitability, return, and valuation of firms in India. Shareholder activism predicts an insignificant negative impact on firm performance.…”