PORTFOLIO FIRM RESPONSES TO INSTITUTIONAL INVESTOR ACTIVISTS AND THEIR TACTICS

Abstract

ABSTRACT Purpose Institutional Investor Activism (IIA) has become a dynamic institutional force and a valuable tool for institutional investors in their attempt to influence their portfolio firms. Correspondingly, there has been a rapidly increasing body of scholarly literature devoted to understanding this phenomenon as it affects numerous disciplines within the organization science academy. Prior research in IIA has considered a number of antecedents and processes that may influence corporate outcomes (Goranova & Ryan, 2014b), yet results have been equivocal thus leaving unanswered questions critical for the scholarly discourse on IIA. An overlooked aspect of this literature is the heterogeneity that exists among institutional investor activists and the impact these differences can have on portfolio firm responses. This study examines the heterogeneity of private pension fund and mutual fund activists and answers the following research questions: 1: How do the characteristics of institutional investor activists ultimately influence the likelihood that a firm will comply with an investor's requests/demands?; 2: How is the relationship between institutional investor activists and firm responses moderated by activism tactics? Method To test the hypotheses, we built a database of activism events by institutional investors (II). For comparison purposes, we limited the database to activism events that occurred within the United States. The database included completed activism events from 2010-2017 with completed activism events defined as II demands that resolved (either positively or negatively) within four years. The sample used all activism events for private pension funds and mutual funds. The sample ended up being 238 IIA events spread across the two different types of IIs with the unit of analysis being the II-portfolio firm dyad. The sample included 122 non-proxy-based tactics and 146 proxy-based tactics used within the 238 activism events. Data and databases came from Activist Insight, Thomson Reuters, S&P Capital IQ, the Investor Responsibility Research Center (IRRC), Institutional Shareholder Services (ISS), and Lexis-Nexis. Portfolio firm-level data came from Standard & Poor's Compustat annual dataset. Drawing on 238 observations activism events in the United States, we undertake an empirical test of the effects of private pension fund and mutual fund activism on portfolio firm responses using ordered logistic regression. Results Overall, the tests of the models showed mixed support for the hypotheses. Private pension plans were found to be less likely to receive favorable responses from their portfolio firms whereas mutual funds are not less likely to receive favorable responses from their portfolio firms. In addition, the moderating effects of proxy-based tactics on both types of institutional investors were not supported which runs contrary to prior research. Future research should continue to explore the differences among institutional investors as we have limited understanding of their effects to date. Conclusion These results, and the use of ordered logistic regression with interaction terms, highlight both the success in understanding variance among institutional investors and the continued need for further research on shareholder activism. Keywords Shareholder Activism, Mutual Fund Activism, Stakeholder Salience Theory, Activism Tactics, Strategic Management