Traveling Governance Effect of Shareholder Activism: Evidence from Clawback Provision Adoption

Abstract

We examine the propagation of governance mechanisms across firms held by the same institutional activist blockholders (IABs). We find that a firm is more likely to adopt clawback provisions when more of other firms held by the same IABs have adopted clawback — an effect we call traveling governance. This effect is stronger when the level and duration of common ownership by IABs are higher, and when IABs have more past activism experiences. This traveling governance effect is distinct from peer-effects stemming from common industry, common location, or board interlocks. Our results are not driven by endogenous selection by IABs. Further, our placebo tests show that this traveling governance is absent for firms held by the same passive institutional blockholders and firms that share common IABs only in the past. Finally, we find that traveling governance substitutes internal board governance, but complements external governance by the product market. Overall, our findings suggest that IABs act as effective gatekeepers to monitor their portfolio firms through an indirect and potentially less costly mechanism.