2012 Cambridge Business & Economics Conference
ISBN : 9780974211428
The informational content of Annual General Meetings in civil-law countries
Monica Martinez-Blasco, IQS School of Management-Universitat Ramon Llull*
Josep Garcia-Blandon, IQS School of Management-Universitat Ramon Llull*
JosepMªArgiles-Bosch, Universitat de Barcelona**
*Associate Professors of Finance
IQS School of Management-Universitat Ramon Llull.
Via Augusta 390, 08017 Barcelona, Spain.
monica.martinez @iqs.edu
josep.garcia@iqs.edu
* * Associate Professor of Accounting
Facultatd’EconòmiquesiEmpresarials-Universitat de Barcelona.
Av. Diagonal 690, 08034 Barcelona, Spain.
josep.argiles@ub.edu
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ABSTRACT
The Annual General Meeting (AGM) constitutes the most important corporate event.
Nevertheless, its role as an efficient instrument for corporate governance has recently
come under increasing scrutiny and numerous proposals for reform have emerged in as
a result. The purpose of this paper is to assess the informative content of AGM in civillaw countries. Previous literature investigation information content of the AGM is
primary based in two common-law countries (the U.K. and the U.S). Given the
importance of a country’s legal tradition, we cannot assume on a priori basis that results
obtained in countries whose legal tradition is based on the common-law as the U.S. and
the U.K. can be directly extrapolated to countries with a different legal tradition. To
carry out this research, we analyse the role of the AGM France, Germany, Japan and
Spain.
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1.
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INTRODUCTION
In this paper we focus our attention on a main mechanismto guarantee good corporate
governance, the Annual General Meeting (AGM). There are four lines of research to
approach the AGM, [Catasús 2007, p.169]: 1) Studies that examine the informational
content of the AGM; 2) The relation of AGM with corporate governance issues, like
voting practices and participation at the event; 3) Critical historical analysis of specific
events occurred at the AGM; and 4) Sociological theories to the consideration of the
meetings between investors and managers. In this paper, we analyze the AGM and its
informational content in countries with different legal tradition, increasing the already
existing literature that followsthe first line of research listed above.
During the AGM the corporate executives address not only shareholders, but also the
financial markets. From a legal standpoint, the AGM constitutes a main corporate
governance instrument that enables shareholders tolimit the possibility of expropriation
by managers. There are certain decisions that can only be approved at the AGM, as for
example, the election of the Board of Directors, and important managerial
announcements, usually concerning the managers’ views about the company’s
prospects, are often made. Stratling (2003) defines the following main functions of the
AGM: 1) To inform shareholders on the company's financial results and on major
business decisions that have been taken; 2) To obtain shareholders’ approval of the
decisions that do not rely on the managerial discretion of the Board; and 3) To provide a
forum for discussion between managers and shareholders on the past performance of the
company and its future actions and prospects.Two of these functions involvethe
transmission of relevant information from managers to shareholders.
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Despite the large amount of research to measure the impact of corporate events on the
value of the company, perhaps one of the most important events that companies are
facing each year necessarily, the Annual General Meetings (AGM), has attracted little
attention to researchers. At that annual meeting the shareholders of the companies have
the opportunity to demand accountability to the president of the company for his
management thus becoming this way an important tool of corporate governance. The
AGM take place mandatorily in Spain once a year, before the end of the first semester.
During the meeting the president requests to shareholders the approval of management
reports and the consent to certain business decisions beyond their power, providing this
way information to the financial market about the strategies that the board intends to
follow. An AGM makes available to analysts and investors a lot of qualitative and
quantitative information to which the market is expected to react by changing the price
and trading volume of the shares of the company in question (Kim and Verrecchia,
1991).
Regarding the empirical investigation we have found only four articles that have studied
this event and all of them have focused their studies on companies listed in AngloSaxon indexes. Firth (1981) conducts its research with a sample of 120 companies listed
on the UK stock market using weekly data without being able to spot prices or abnormal
trading volumes, concluding that the AGM do not seem to provide a higher level of
information than average. Brickley (1985) conducted his investigation with a random
sample of 100 firms listed in CRSP for the period 1978-82 to analyze the profitability
during the days around the event. The author finds positive abnormal returns around the
shareholder meetings and therefore the results are consistent with the ones obtained
years earlier by Kalay and Loewenstein. Ten years later, Rippington and Taffler (1995)
perform an analysis of the impact of the information provided by four types of corporate
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events relevant, being one of them the AGM and using daily market data from 337 UK
companies listed on London Stock Exchange. In their analysis, the authors take into
account the size of the companies, separating from its original sample all the companies
with a capitalization of less than 10 million pounds. The authors conclude that the AGM
seem to convey little information to the market, even for smaller companies.
Finally Olibe (2002) investigates around the British companies traded in the NYSE and
Amex indexes between 1994 and 1998 analyzing the returns and negotiated volumes
around the AGM dates. In this case, abnormal volumes and abnormal returns were
found on the days of the AGM, however the total magnitude of the negotiated volumes
was significantly low, what suggests that only a few US investors find the AGM
informative. Olibe (2002) concludes his article stating that a possible limitation of the
results is given by the fact that they are focused only on the U.S. stock market so the
results cannot be generalized. In this regard, La Porta et al. (1998) argue that the legal
basis-governing shareholders' rights are central for the corporate governance
mechanisms and that these are not the same in all countries. As the authors conclude,
the degree of shareholder protection is much higher in Anglo-Saxon countries than in
countries governed by civil law, as in the case of Spain, so we cannot assume that AGM
have the same effect depending on the legal family to which those countries belong.
On the other hand, the first investigation of the issue in a civil-law country is found in
Garcia-Blandon et al. (2011a, 2011b) where the authors uses daily data and two
different methodologies to assess the informative content of AGM in Spain. Both
methodologies show that AGM in Spain has no significant effects either in returns,
volatility or trading volume indicating that no relevant information is released to the
financial market during these meetings.
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To assess for the informative content of the AGM in civil-law countrieswe empirically
test whether there are differences in the impact of AGM on returns, returns volatility
and trading volume on a sample of civil-law countries. Abnormal price changes
[Beaver, 1968] and abnormal trading volume [Kim and Verrecchia, 1991] are the
investor’s response to disclosure information, thus we expect abnormal results and
trading volume whenever AGM is translating new information to the financial markets.
This paper contributes to the extant researchin international corporate governance in by
addressingthe release of value-relevant information during AGMfor the first time in
France, Germany and Japan, both of them civil-law countries.
The remainder of the chapter follows as: in the next section we discuss the methodology
and data set used, which results are discussed in section 3.Finally, in section 4 we
present our main conclusions.
2.
METHODOLOGY
In subsection 2.1 and 2.2 we present the sample and dataset used in our research and the
methodology we propose to address the informational content of AGM.
2.1Sample and Dataset
To accomplish our goal, we examine abnormal price andtrading volume around AGM
in France, Germany, Japan and Spain, from January 2005 to June 2010. Our sample is
formed by the most representative companies of each stock market.
The daily trading data has been obtained from Thompson-Reuters 3000Xtra database,
and information about AGM dates has been hand collected from each country stock
market regulatory organism, in a first approach. When the date of the AGM was
missing in our primary it has been obtained from the company corporate web page.
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2.2Methodology
We have followed the Brown and Warner (1985) (BW) event study methodology to
assess the information usefulness of AGM in countries different legal tradition. We
have tested the aggregate market’s average reaction to the information released by
testing the change in pricethroughtwo different measures: abnormal and absolute value
abnormal returns. Additionally, we have also tested the sum of all individual investor’s
tradesaround AGM dates by analyzing the change of trading volume. The three
indicators of the market reaction of the release of information have been performed
individually for each one of the six countries belonging to our sample.
We compute abnormal returns (AR) as the difference between actual and normal
returns, whilenormal returnsaredefined as the expected returnwithout conditioning on
the event.
The return on security i over period tis defined as:
Rit= E ( Rit Xt ) + ARit
[1]
it
Where,Rit, E ( Rit Xt )
it
and ARitare the actual, normal, andabnormal returns,
respectively.Xt is the conditioning information set for the normal return model.We
compute expected or normal returns by using the market model, thus we assume that
normal return is given by a linear relationship between the stock return and the market
return.
E ( Rit Xt )it = ai + bi Rmt
[2]
æ CountryIndext ö
Rmt = ln ç
÷
è CountryIndext-1 ø
a and b estimated parameters
[3]
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We estimate the security normal returns through a pre-event period of 151 days starting
on day -170 to day -20 being 0 the day of the AGM.
We have not limited our research to the day of the event but also we have also
examinedan 11 days event window [-3, +3].
After estimating daily average abnormal returns for each firm, the average abnormal
return for each country whole sample, inday t (AARt) has been calculated:
1 N
AARt = å ARit
N i=1
[4]
The first null hypothesis states:
Hypothesis 1: The average abnormal returns will not be affected bythe AGM.
For each country, a large number of events from different firms are studied. Unless all
the companies experience the same positive or negative reaction to the AGM, positive
and negative abnormal returns would cancel each other out, which would implies that
we would not be able to detectchanges in price.To avoid this problem we have also
examined the stock price volatility around AGM, measure as the absolute value of
abnormal returns, and then we have proceeded similarly as with abnormal returns. The
only difference arises in how abnormal returns are computed: when abnormal returns
are computed in absolute values, they cannot be directly used to perform a parametric
test, because the null hypothesis, that a sum of absolute values is zero, will be rejected.
Therefore we correct absolute returns by the mean value of the pre-event period.
Our second null hypothesis states:
Hypothesis 2: The volatility of stock returns will not be affected by the AGM.
When information is released to the market the investor’s reaction could be seen in both
price and trading volume changes, [Kim and Verrecchia, 1991]. High trading volumes
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around a company event would be associated with the release of new information,
[Kyle, 1985].
Following Menendez (2005), we define abnormal trading volume, for stock i on day t
as:
AVit =
Vit
-1
104
æ -20
ö 1
ç å Vit + å Vit ÷ x
è t=-94
ø 150
t=30
[5]
Where, Vit is the traded volume in euros of stock i on day t .
As we did with returns, once abnormal daily volumes have been computed for each
firm, the average abnormal volume on day t (AAV) is calculated as:
AAVi =
1 N
å AVit
N i=1
[6]
Our third hypothesis states:
Hypothesis 3: The volume of shares traded will not be affected by the AGM.
The three null hypotheses have been tested through anon-parametric test. Then for every
day t we calculate the average rank of all the firms studied and compare it to the average
rank under the null hypothesis of no abnormal returns:
( K i = 0.5 +T i/2)
m( K i ) 
1
N
[7]
N
 (K
i 1
i0
 Ki )
[8]
Next we calculate the standard deviation s(K) of the set of m( K i ) for all the combined
period.
s( K ) 
20
 (m( K ))
i  90
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i
2
/ Ti
[9]
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The set of m( K i ) is standardized:
z (t ) 
m( K i )
s( K )
[10]
3. RESULTS
3.1 Change in Price
Panel 1 and panel 2 in table 1 shows that, for the shareholder meeting dateallows us to
reject the two null hypotheses concerning price changes at 1% level in Germany. The
calculations show positive and significant price changes during the AGM date but also a
sever correction the day after, with a significant increase in volatility and a -2.2%
negative abnormal return on t=+1. The return reaction lasts for several days.
Panels 1 and 2 in table 2 presents AAR and AAAR surrounding the AGM dates in
Japan. As it can be seen, Corrado’s test do not detect a significant reaction in price
changes during the AGM celebration in Japan, thus the two null hypotheses concerning
price changescannot be rejected. Therefore, the celebration of the AGM is no
translating, in average, any value-relevant information to the financial market in the
same day or in days surrounding the event. What it can be also seen in table 2 is a
negative and significant volatility the days after the AGM what may confirm the lack of
information during the shareholders meeting. This extraordinary low level of volatility
phenomena is detected on all days belonging to the event window.
It isinteresting to compare the Japanese and German results. Besides the two countries
belong to the same legal tradition, donot exist any similarity between AR and AAR in
Germany and Japan. Whereas in Germany the results show an average market reaction
to the AGM celebration, in Japan nothing indicates that information is released. In that
case, we can affirm that particular countries characteristics are more important than
legal tradition.
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[Insert table 1]
[Insert table 2]
France and Spain price changesresults are reported on table 3 and table 4(panel 1 and
2), respectively. We find a lack of significance in both AAR and AAAR on the AGM
day in both countries, thus the two null hypotheses of price changes cannot be rejected.
Both countries show the same results for the AGM day, but a closer look to the days
surrounding the event makes arise quite significant differences. On one hand, in the
French sample we cannot find any price anticipation to the meeting while in Spain we
detect a positive change in returns on t=-3 and t=-1, and a negative change in volatility
on t=-3.
On the other hand, a later reaction to the event is found in France, where negative
returnsare found on t=+2with an above-average volatility on t=+2. This reaction is not
found in Spain, where the days after the AGM do not seem to be different to any other
day.
[Insert table 3]
[Insert table 4]
3.2 Change in volume
The behaviour of trading volumes around the AGM dates in Germany and Japan are
reported in panel 3 in table 1 and table 2, jointly with the Corrado rank test. Similarly as
reported in price changes previous results, we have not found a similar behaviour
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between the two countries. Shareholder meetings do not seen to have any effect on
stock trading volumes in Japan, where the results show a systematic lower-average
trading activity, besides no significant, within the event window. Consequently, the null
hypothesis number three stating that trading volumes will no be affected by the AGM
cannot be rejected for Japan. In the contrary, Germany results show significant trading
volumes for almost all days before the AGM within the event window, for the AGM
day, and for the day after. Therefore, the null hypothesis number three concerning
trading volumes is rejected for Germany.We can conclude that investors review their
portfolio based on the information release previous, and during the AGM.
Analysing France trading volume response to the AGM celebration, the t-statistic
andCorrado rank test confirm the existence of above-average trading activity in both the
AGM day and the day after. The null hypothesis that states that trading volumes are not
affected by the AGM celebration is rejected in the French case.
The AGM celebration in Spain does not affect trading volumes. Therefore we cannot
reject the third null hypothesis in Spain. The results are in line with previous
investigations [Garcia-Blandon et al. (2011b)] that find no abnormal trading activity in
Spain during the AGM. An abnormal trading volume is detected in day t=+2 as a late
reaction to the information realised during the event.
4. CONCLUSIONS
For the civil-law countries, idiosyncratic characteristics of each country are more
important than the legal origin. Only in Germany, the financial market in average find
the AGM informative, whereas in Japan, France and Spain the AGM is not releasing
any value-relevant information. Although the common characteristic of the three latest
countries is the inexistent reaction of the financial market, the main differences among
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them arise during the days surrounding the AGM: the market anticipates the AGM in
Spain, France reacts late to the shareholders meeting, and Japan show any king of
reaction within the event window.With the only exception of Japan and Spain, the
invertors of the remaining countries, independently of the legal origin, find the AGM
informative and they review their portfolio according to the information released.
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References
Beaver, W. (1968). The information content of annual earnings announcements.Journal
of Accounting Research, 6, 67-92.
Brickley, J. (1985). Interpreting Common Stock Returns around Proxy Statement
Disclosures and Annual Shareholder Meetings, Journal of Financial and Quantitative
Analysis, 25 (3), 343-349.
Brown, S., Warner, J. (1985). Using Daily Stock Returns: The Case of Event Studies.
Journal of Financial Economics, 14, 3-31.
Catasus, B., Johed, G. (2007). Annual general meetings-rituals of closure or ideal
speech situations?A dual analysis.Scandinavian Journal of Management, 23, (2), 168190.
Corrado, C. (1989). A nonparametric test for abnormal security-price performance in
event studies.Journal of Financial Economics, 23, 385–95.
Firth, M. (1981).The relative information content of the release of financial results data
by firms, Journal of Accounting Research, 19 (2), 521-529.
Garcia-Blandon, J., Martinez-Blasco, M., Argiles-Bosch, J.M. (2011).The Role of
Annual General Meetings in a Civil-Law Country. In Kose, J., Makhija, A.K. (Ed.),
International Corporate Governance (Advances in Financial Economics, vol. 14.), pp.
87-108. UK: Emerald Group Publishing Limited.
Garcia-Blandon, J., Martinez-Blasco, M., Argiles-Bosch, J.M. (2011). Does the Annual
General Meeting involve the release of relevant information in non-common law
markets? Evidence from Spain.Revista Española de Financiación y Contabilidad.
Forthcoming.
Kim, O., Verrecchia, R. E. (1991). Trading Volume and Price Reactions to Public
Announcements. Journal of Accounting Research, 29(2), 302-321.
Kyle, A. (1985). Continuous auctions and insider trading, Econometrica, 53, 1315–35.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. (1998). Law and finance.
Journal of PoliticalEconomy, 106, 1113-1155.
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Menendez, S. (2005). Market valuation of the analysts’ recommendations: the Spanish
stock market. Applied Financial Economics, 15, 509-518.
Olibe, K.O. (2002). Theinformationcontent of anual general meetings: a price and
trading volumeanalysis. Journal of International Accounting, Auditing and Taxation,
11, 19-37.
Rippington, F., Taffler, R. (1995).The information content of firm financial
disclosures.Journal of Business Finance and Accounting, 22 (3), 345-362.
Stratling, R. (2003). General Meetings: A Dispensable Tool for Corporate Governance
of Listed Companies?.Corporate Governance: An International Review, 11, 74-82.
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Table 1 Daily average abnormal returns, absolute value abnormal returns, and abnormal
volumes at annual general meeting dates in Germany
Day
AAR
Corrado
AAAR
Corrado
AAV
Corrado
-3
0.0030
2.0319* 0.0112
0.0053 0.0656
1.1341
-2
0.0006
0.6853 0.0143
1.0620 0.2143
2.1211*
-1
0.0002
0.4929 0.0107
-0.1133 0.5782
4.1102**
0
0.0048
2.3325* 0.0146
2.1529* 1.1949
4.4522**
1
-0.0224
-6.766**
0.0274
5.966** 0.4047
3.7985**
2
-0.0013
-0.9228
0.0102
-0.0949 0.0700
0.9632
3
0.0000
-0.1052
0.0102
-0.9961 0.0871
1.0627
* significant at the 5% level.
** significant at the 1% level.
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Table 2 Daily average abnormal returns, absolute value abnormal returns, and abnormal
volumes at annual general meeting dates in Japan
Day
AAR
Corrado
AAAR
Corrado
AAV
Corrado
-3
-0.0013
-1.203
0.0089
-1.8544 -0.1796
-1.9055
-2
-0.0005
-0.335
0.0095
-1.5919 -0.1513
-1.5837
-1
0.0000
0.111 0.0102
-1.0350 -0.1240
-1.2826
0
0.0003
0.301 0.0091
-1.7156 -0.1441
-1.5441
1
-0.0007
-0.591
0.0084
-2.1094* -0.1105
-1.0269
2
-0.0015
-1.521
0.0090
-1.7981 -0.1455
-1.6087
3
0.0003
0.335 0.0084
-2.2594* -0.1721
-1.8349
* significant at the 5% level.
** significant at the 1% level.
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Table 3 Daily average abnormal returns, absolute value abnormal returns, and abnormal
volumes at annual general meeting dates in France
Day
AAR
Corrado
AAAR
Corrado
AAV
Corrado
-3
-0.0003
0.2340 0.0110
-0.4531 0.0298
-0.1390
-2
0.0023
0.8816 0.0110
-0.7224 0.0718
0.4458
-1
-0.0009
0.0104
-1.1578 0.1593
1.9176
0
0.0008
0.2694 0.0129
1.2912 0.3108
3.6745**
1
0.0010
0.5633 0.0117
0.2492 0.2179
2.6582**
2
-0.0036
-2.0299*
0.0146
2.2577* 0.1166
1.4262
3
-0.0009
-0.6068
0.0109
-0.2341 0.2421
1.5221
-0.0980
* significant at the 5% level.
** significant at the 1% level.
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Table 4 Daily average abnormal returns, absolute value abnormal returns, and abnormal
volumes at annual general meeting dates in Spain
Day
AAR
Corrado
AAAR
Corrado
AAV
Corrado
-3
0.0018
2.0783* 0.0087
-2.3433* 0.0501
0.6482
-2
-0.0001
0.6551 0.0112
0.3954 0.0577
0.7411
-1
0.0019
2.730** 0.0111
0.2197 0.1102
1.5441
0
0.0004
0.3558 0.0116
0.9227 0.1257
1.3154
1
0.0006
0.0964 0.0104
-0.7821 0.0716
0.3527
2
0.0005
0.1663 0.0115
0.4042 0.1681
2.1613*
3
-0.0016
0.4569 0.1026
1.6133
-1.6693
0.0110
* significant at the 5% level.
** significant at the 1% level.
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