Institutional ownership and the spillover effects of shareholder activism

Abstract

Research question/issue: This study examines the spillover effects of institutional activism on non-targeted firms, which share the same ownership and size characteristics as targeted firms. Research findings/insights: We document that institutional activism leads to a significant spillover effect at non-targeted firms, which share the same ownership and size characteristics as the targeted firms. The portfolios of matching non-targeted firms experience a significant positive wealth effect on announcement of shareholder activism campaigns at a targeted firm. Managers of the matching on-targeted firms respond to the activism threats by reducing agency costs (i.e. reducing cash balance and increasing dividend payment) and by improving operating performance (i.e. improving profitability ratios and cutting down on capital and operating expenditure). We further show that shareholder activism impacts not only stock returns but also stock risk. Theoretical/academic implications: First, we study the effects of institutional activism using a new database, i.e. the Thomson Reuters shareholder activism intelligence (TRSAI), which allows us to study the effects of various types of activist investors beyond hedge funds. We highlight that the positive externalities of shareholder activism depend on institutional ownership. The higher the proportion of institutional shareholdings, the larger is the wealth effect and the decline in risk measures. However, the volatility in institutional shareholdings produces an opposite effect. Practitioner/policy implications: Our study highlights that the threat of activism as a potent force in disciplining companies extends well beyond targeted firms.