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JARDIS Workshop (Dec. 8, 2007) The Effects of Active Shareholders

Meetings on the Firms' Disclosure Policy

Tomoki OshikaWaseda University

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Outline

Backgrounds and motivationsEmpirical results on firms with active shareholders meetings

Accuracy of earnings forecastsDegree of discretionary accrualsMarket reaction

Active meetings v.s. long meetings

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Backgrounds

Managements need to keep good relations with investors to protect themselves in case of hostile takeoversTo do so, they need to be seen as good (clean, trustworthy) managements by making aggressive disclosuresThe policy will be seen as

Active shareholders meetingsMore accurate earnings forecasts

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Goals

To certify the relations between active shareholders meetings and accuracy of earnings forecasts

But accurate earnings forecasts can also be achieved by ‘managing’ actual earnings

To certify if the firms with active meetings do not manage actual earnings by using discretionary accurualsTo see if the stock markets react favorably

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Situations surrounding shareholders meetings

Old situation: Meetings as ceremoniesConstant economic growthManagements who prefer short meetingsCorporate racketeers (sokaiya) who help ‘smooth’meetings

New situation: Normalization of meetingsDissolving cross-holdingsEliminating racketeersPositive images to long meetings

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Attracting individual shareholders

As loyal shareholdersDisclosure through web pagesElectronic voting through mobile phonesEasier-to-understand disclosure

Trade offs between return and time of individuals

As loyal consumersSpecial benefits to shareholders (e.g. gift certificates, souvenirs)Meetings as events (e.g. concerts, party)

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Earnings forecasts by managements

‘Requests’ from stock exchanges by Timely Disclosure Rules

Forecasts of sales and earningss of current fiscal year are released with accounting results of previous yearTimely disclosure is required when changing forecasts

Those forecasts are useful for individual investors who do not have economic incentives and time to see details

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Hypotheses developments

H1: Firms with active shareholders meetings disclose more accurate earnings forecasts

If the null of H1 is rejected,

H2: Firms with active shareholders meetings do not record larger discretionary accruals

H3: Firms with active shareholders meetings are treated favorably by the stock markets

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Definitions of active shareholders meetings

Each shareholders meeting held between 2000 and 2003 is classified as ‘Active’ if both of two criteria are satisfied:

① Longer than 1.5 times of average length of shareholders meetings held in 1990s for a given firm

② Longer than 60 minutes

・Average length in 2000 to 2003 are 36～43minutes・Changing the thresholds to two times and/or 45 minutes does not make big difference

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Samples

Samples are extracted according to the following criteria:

Liseted on 1st and 2nd section of TSE at the end of March 2005Fiscal year end in MarchOther than banks, securities, and insurancesMore than seven years in 1990s of the length data are available

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Data

Data on shareholders meetings are hand-collected from Shiryoban-ShojiHoumuData on stock prices and financial statements are extracted from Nikkei NEEDS-FQThe top and bottom 1% of each variables are omitted as outliersOrdinary Income and Net Income are used

121999 2000 2001 20023/31 3/31 3/31 3/31

ForecastsRelease

Active

Not Active

Before Activation or After?

Forecasts by Other Firms

Forecasts Release

Forecasts Release

Forecasts Release

Forecasts Release

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Results of H1 (Forecasts accuracy)

Accuracy of forecasts are defined as:

Used Wilcoxon’s rank-sum test since we cannot specify the distributions in advance

The null is rejected if the rank-sum of active samples are significantly small

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⎟⎠⎞

⎜⎝⎛≡

AssetsTotalEarningsActualEarningsForecastedAccuracy

　

　　－　　

No. of

Obs Average Median Z stats Average Median Z stats

Active 311 0.000571 0.000057 -0.00067 0.000035

Non-Active 2692 0.001151 0.000117 0.000849 0.000087**

Ordinary Income Net Income

-2.5243 ** -4.0554

** shows 1% significant

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Estimation of discretionary accruals

Used four models to estimate non-discretionary portion of accruals

Jones Model (Jones, 1991)Modified Jones Model (Dechow et al., 1995)CFO Modified Jones Model (Kasznik, 1999)Growth Model (Dechow et al., 2003)

Used industrial cross-sectional data according to DeFond and Jiambalvo (1994) and Subramanyan (1996)

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Results of H2 (Discretionary accruals)

Discretionary accruals can be either positive or negative

Use absolute numbersDiscretionary accruals of active firms are not necessarily smaller than non-active firms

What we need to know is if active firms record discretionary accruals to show pseudo accuracy

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Results of H2 (Discretionary accruals)

The results show ‘small’ discretionary accruals for active firms, though not perfectly significant

Model Obs Average Median Z-stat

Active 535 0.02230 0.01784

Non-Active 4286 0.02354 0.01924

Active 536 0.02208 0.01754

Non-Active 4274 0.02356 0.01933

Active 523 0.01787 0.01490

Non-Active 4287 0.01858 0.01566

Active 532 0.02089 0.01680

Non-Active 4121 0.02271 0.01810

CFO Modified Jones -1.2523

Growth -1.9623 *

Jones

Modified Jones -1.8861 *

-1.4993

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Results of H3 (Market reaction)

stock price is explained as (Ohlson, 2001):

To make cross-sectional comparison available, we added the dummies for active firms, and interaction terms of active firm dummy and earnings forecasts:

NORM is the dummy variable, 1 for active firms and 0 otherwise

( )14321 ++++=≈ ttttttt xEdxBVVP αααα

( ) ( )11615143210 +−−+ ×++++++=≈ ttttttttttt xENORMNORMxEdxBVVP ααααααα

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Results of H3 (Market reaction)

α6 is significantly positive Earnings forecasts of active firms have more explanatory power to stock prices than those of non-active firmsα5 is significantly positive Markets react favorably to active meetings themselves

Better image (Yanaga[2001])?Lower cost of capital (Botosan and Plumlee[2002], Otogawa[2000], Suda et al. [2004], Uchino[2005])?

Obs α 0 α 1 α 2 α 3 α 4 α 5 α 6

** ** ** ** ** **

66.112

(2.59)

2.736

(3.60)

8.573

(9.11)

8.007

(23.78)

0.443

(22.31)

0.533

(3.22) 3565

(-1.19)

-11.453

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Long = Active?

Underlying ConceptsManagements try to attract individual shareholders

They do not necessarily use shareholders meetings to attract institutional investorsThey do not have to distribute gifts to shareholders

Managements need to explain without jargonsManagements need to answer questions thoughtfully

They have rights to cut off the questions

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Some anecdotal evidences

Corporate governance of Japanese firms can be said matured if firms start boasting the length of shareholders meetings (Yomiuri Shimbun, 6/13/05)In this context, ‘activation of meetings’ means individual-shareholders-conscious ingenuities of meetings operations (ShojiHoumu, Vol.255)The number of meetings without questions became smaller (White book of shareholders meetings)

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Some additional numbers (1)

Average length for all listed firmsAverage Length

0

10

20

30

40

50

60

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Some additional numbers (2)

Portions of firms who hold annual meetings on concentrated day became smaller

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005

active

non-active

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Some additional numbers (3)

The percentage of shareholders who attend meetings are increased especially at active firms

Change after 2yrs of the activation

Year active non-active

2001 0.4% -3.5%

2002 8.3% 4.0%

2003 13.3% 8.6%

2004 18.2% 6.4%

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Some additional numbers (4)

Shareholders clienteleHoldings by other firms

0%

5%

10%

15%

20%

25%

30%

35%

2001 2002 2003 2004 2005

active

non-active

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Summary

Firms with long shareholders meetings have:released more accurate earnings forecastsrecorded (at least) the same level of discretionary accrualsbeen reacted favorably by the stock market

Long shareholders meetings seems to have relations with other factors of active meetings

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Future researches

More precise research design for time-series analysis is requiredMore precise control on the activations of shareholders meetings

Working on data collecting on meetings agendaAnalysis on significance of shareholders meetings

More and more firms try to activate meetingsMore and more firms may try to show as ‘active’