The “CalPERS effect” revisited again

Smith [Smith, M., 1996. Shareholder activism by institutional investors: evidence from CALPERS. Journal of Finance 51, 227-252] and Wahal [Wahal, S., 1996. Public pension fund activism and firm performance. Journal of Financial and Quantitative Analysis 31, 1-23] identify significant positive abnormal returns surrounding the announcement of performance targetings by the California Public Employees Retirement System (CalPERS), dubbed the “CalPERS effect.” More recent studies suggest that this “CalPERS effect” continues in later samples. While I confirm the early period results, I find the results reported in studies examining later periods are driven by the inclusion of early 1992-1993 targetings and from a significant bias in the market model parameters caused by estimation during periods of known under-performance. Additionally, these results are partially driven by the failure to control for contaminating events and the use unnecessarily long event windows. Contrary to previous studies, after addressing these methodological concerns, I find no evidence to support the continued existence of a “CalPERS effect”.