Anticipating loss from proxy contests

In this paper, we examine corporate policy decisions made in anticipation of and subsequent to a proxy contest. Our results suggest that managers increase dividend payouts and leverage and decrease acquisition spending in the year prior to the proxy contest when they anticipate that dissidents may prevail in the contest. Furthermore, these policy concessions to dissidents are not reversed in the year after the proxy contest. On the other hand, managers do not change corporate policies prior to the contest when they expect to prevail over dissidents. Furthermore, they take advantage of winning the contest to pursue policies that reduce the extent of discipline imposed on them. Overall, our results suggest that proxy contests play a disciplinary role only when incumbents anticipate a loss in the contest and are therefore forced to pursue policy choices preferred by dissidents.