Institutional Investor Activism Research Articles

Compensation-related institutional investor activism – a literature review and integrated analysis of sustainability aspects

PurposeThis paper aims to analyse whether and how different types of institutional investors influence shareholder proposal initiations, say-on-pay (SOP) votes and management compensation from a sustainability perspective.Design/methodology/approachBased on the principal-agent theory, the authors conduct a structured literature review and evaluate 40 empirical-quantitative studies on that topic.FindingsThe traditional assumption of homogeneity within institutional investors, which is in line with the principal–agent theory, has to be questioned. Only special types of investors (e.g. with long-term and non-financial orientations and active institutions) run an intensive monitoring strategy, and thus initiate shareholder proposals, discipline managers by higher SOP dissents and prevent excessive management compensation.Research limitations/implicationsA detailed analysis of institutional investor types is needed in future empirical analyses. In view of the current debate on climate change policy, future research could analyse in more detail the impact of institutional investor types on proxy voting, SOP and (sustainable) management compensation.Practical implicationsWith regard to the increased shareholder activism and regulations on SOP and management compensation since the 2007/2008 financial crisis, firms should be aware of the monitoring role of institutional investors and should analyse their specific ownership nature (time- and content-driven and as well as range of activity).Originality/valueTo the best of authors’ knowledge, this is the first literature review with a clear focus on institutional investor range and nature, shareholder proposal initiation, SOP and management compensation (reporting) from a sustainability viewpoint. The authors explain the main variables that have been included in research, stress the limitations of this work and offer useful recommendations for future research studies.

Activism failure of state-owned pension funds with board seats in Brazil

There is no clear positive and significant impact of institutional investor activism in Brazil possibly due to lack of skills, portfolio diversification motivations (Sonza & Granzotto, 2018), and conflicts of interest (Maranho, Leal, & Bortolon, 2020). This article investigates two high profile activism cases to assess these conjectures and address two very large and widely held Brazilian companies, which had good corporate governance indicators and were not state-controlled or closely regulated. The cases involve the two largest Brazilian pension funds, both sponsored by state-owned companies because their size and importance would make a positive outcome more likely. Yet, in both cases, the pensions funds failed in their attempts, even when acting jointly with other foreign and domestic institutional investors. The conclusion suggests that these investors may lack skills to assess the likelihood and consequences of events that occurred soon after their investment and that changed the fundamental nature of their investees. This study places the lack of activism success under the general discussion of the challenge of costly active versus passive portfolio management. Finally, there was no evidence of conflicts of interest and political alignment of these state-related pension funds in these two activism situations

The impact of Japan’s stewardship code on shareholder voting

This study investigates the impact of Japan’s Stewardship Code on the shareholder voting behavior of institutional investors. The stewardship code is not mandatory with legally binding regulations, but it encourages institutional investors to exercise their voting rights and monitor their investee firms to improve their investee firm value. I find that Japan’s Stewardship Code leads trust banks and insurance companies that accept the code and do not lend money to their investee firms to become more likely to vote against the appointment of representative directors and CEOs in firms with lower profitability. Furthermore, after the code, pension funds and foreign shareholders become more likely to vote against the appointment of representative directors and CEO appointments in firms with lower profitability. These results suggest that Japan’s Stewardship Code promotes voting activities of institutional investors.

A rare move: The effects of switching from a closing call auction to a continuous trading

AbstractThis study investigates the effects of switching to a closing continuous trading (CCT) on market quality, while considering the trading behaviors of different types of traders. Investors become more patient in the period preceding the last trading phase, which reduces the bid–ask spread (BAS) in that period. We find an increase in the BAS and volatility during the last trading phase, due to diminishing investor patience. Market volatility and the closing pricing errors relate positively to the trading activities of foreign institutional investors. Overall, the introduction of the CCT worsens the market quality before the closing.

PORTFOLIO FIRM RESPONSES TO INSTITUTIONAL INVESTOR ACTIVISTS AND THEIR TACTICS

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

Portfolio Spillover of Institutional Investor Activism: An Awareness–Motivation–Capability Perspective

Scholars have investigated how shareholder activism by institutional investors—organizations that manage money on behalf of clients—directly shapes the actions of firms that are targeted for activi...

Large institutional investors and the pressure to manage earnings surrounding seasoned equity offerings

PurposeThe purpose of this paper is to investigate the monitoring role exerted by large institutional investors and their ability to restrict the earnings management practices conducted around seasoned equity offerings (SEOs).Design/methodology/approachThe sample includes 130 French SEOs by non-regulated firms during 2004-2015. The authors used various cross-section, univariate and multivariate tests using several proxies for earnings management. They attempt to highlight that firms issuing SEOs are more able to manage earnings around SEOs owing to the predominance of large speculative institutional investors. Noteworthy, the monitoring role exerted by sophisticated institutional investors turns out to restrict the earnings management opportunities surrounding a SEOs event.FindingsThe results show that the issuing firms tend to manipulate earnings in an upward trend with respect to the year preceding the SEO offer. Thus, a special attention has been drawn on the fact that the issuing companies strive to prove their ability to manage earnings around SEOs in presence of large speculative institutional investors.Practical implicationsThe results provide useful insights into the role different types of institutional investors play in terms of enhancing both governance and accounting information quality.Originality/valueThis paper adds to the literature questioning the evidence that institutional investor activism frequently engage in misleading earnings management around corporate events. The authors provide an alternative explanation for earnings management around SEOs in the French context.

The role of the business press in the pricing of analysts’ recommendation revisions

We investigate the information-dissemination role of the business press by examining the coverage of analyst recommendation revisions. Consistent with the press providing wider dissemination of analyst reports, we find evidence that coverage of analyst recommendation revisions significantly increases the initial market reaction to these revisions and decreases the subsequent price drift. Furthermore, we find that news flash coverage, rather than in-depth coverage, of a recommendation revision drives both the initial market reaction results and drift results. Finally, we show that broader press coverage influences the activities of large-trade institutional investors but not high-frequency traders. Overall, our findings suggest a complementary role between analysts and the business press: increased dissemination of recommendation revisions, rather than information creation on the part of the business press, serves to better inform the market about analyst recommendation revision decisions.

Operational evidences on the engagement duty of Italian institutional investors

Directive 2017/828 is the main legislative text of reference of the European Union (“EU”) in relation to the engagement duty of institutional investors (insurance companies, pension funds and asset managers) towards investee companies. This paper is intended to provide an overview of the engagement activities of Italian institutional investors and to outline possible developments with respect to local engagement practices. In general, evidence has shown a lack of activism by pension funds and domestic insurance companies, as well as the adoption of a selective/opportunistic approach by asset managers, mainly through collective engagement. Further, the Italian stock exchange showed a certain degree of proactivity in promoting the dialogue between issuer companies and investors. In this scenario, it may be worthy to investigate the opportunity for pension funds and insurance companies to exercise engagement activities in collective form as well.

Acquisitions by family businesses in continental Europe and their differences compared to private equity investors

This study explores whether family business investors and private equity investors in continental Europe significantly differ from their investment approach and performance. Therefore, we analyse 126 acquisitions of listed Continental European firms by family business investors or private equity firms from the years 2002 to 2012. Although most of the performance differences between both investor groups are not statistically significant, the results fit with the existing evidence on shareholder activism of institutional investors like private equity funds and corporate raiders. However, there are some significant differences with respect to target firm characteristics. Consequently, we suggest to increasingly consider family business investors in the research on shareholder activism in Continental Europe.

Legal Bases of Activities of Institutional Investors in Russia, China, and the United States

Legal Bases of Activities of Institutional Investors in Russia, China, and the United States

Institutional investors’ response to improved corporate governance: Evidence from the brazilian capital market

<p>This study examines whether normative pressures from stock market regulators to improve the governance quality of Brazilian listed firms influence the participation and activism of institutional investors. More specifically, we investigate the association between institutional investor’s ownership and firm’s voluntary adhesion to the São Paulo Stock Exchange (B3) differentiated levels of corporate governance quality. Empirical testing is performed on a ten-year (2002–2011) panel data set from a sample of 439 firms listed on the B3. Our findings suggest that firms in differentiated corporate governance levels, that is, with better level of transparency and commitment to monitoring, are more attractive to institutional investors. We interpret this result as evidence supporting the shareholder activism movement, attributed by several scholars to institutional shareholders. Our study contributes to the governance literature on the firm’s response to normative pressures and the ability of internal governance mechanisms to signal lower agency cost to capital market. Our evidence also contributes to the ongoing discussion about the role and influence of institutional investors in the functioning of capital markets, and more specific in emerging market like Brazil.</p>

Role of Institutional Investors in the Resource Provision of the Region’s Economic Growth

The article examines the role of institutional investors in resource provision of the region's economic growth (on the materials of the Kursk region, Russia). The goal of the study is to analyze the current state and trends in the development of investment activities of institutional investors within the economic boundaries of a particular geographic region, the results of which allow to identify the main priority areas in the development of the investment environment for the activities of the regional economy entities under study. The scientific novelty of the study involves shaping the priority area sin the development of the region's economy based on the formation of an efficient investment environment and creation of favorable socioeconomic conditions for the activities of institutional investors. The completed study is based on the methods of economic and statistical analysis and economic modeling. The main result of the study is the development of priorities for the development of investment activities of institutional investors with the purpose of improving the resource provision of the region's economic growth.

Monitoring and Learning by Institutional Investors: Theory and Evidence

This paper revisits information acquisition theory from a corporate governance perspective, provides a novel theoretical motivation for external governance, and enriches the set of feasible empirical tests regarding information acquisition. Institutional investors can enhance firm fundamental values through costly monitoring, while their portfolio decisions are determined by endogenous information acquisition. I provide a simplified model, joining theoretical frameworks of external governance and information acquisition, to understand the intrinsic link between monitoring and learning activities of institutional investors. Intuitively, investors would inevitably acquire some firm-specific information during the process of monitoring a firm. One implication of this “non-separability” assumption, compared to the baseline case, is that investors optimally re-allocate monitoring effort from firms with low value of information acquisition to those with high value of information acquisition. This novel theoretical motivation for investors to exert costly monitoring effort, labelled as the “monitoring-for-learning” mechanism, is the major contribution of this paper that can lend theoretical support to recent empirical findings of monitoring and learning activities. Regarding information acquisition, the model predicts that institutional investors tend to acquire more precise information about the firms they can more effectively engage with and about those they initially hold larger stakes in. Consistent with recent empirical findings about distracted investor attention, the model also suggests that monitoring attention to certain firms be squeezed out when attention for information acquisition is substantially attracted to other firms. Suggestive empirical evidence is provided to support these predictions.

Corporate governance and institutional investors - law in India

Financial markets globally are experiencing competitive monetary easing. In this context, India stands as land of opportunities in attracting institutional investors, especially the foreign institutional investors (now called as foreign portfolio investors). The purpose of this paper is to critically analyse corporate laws in India relating to institutional investors in the context of corporate governance. The study reports that institutional investors role is different from that of other investors in ensuring compliance with corporate governance norms. In spite of incentive to encourage institutional investor activism, legal and business hurdles are acting as deterrence to greater institutional investor activism. An implication of this paper is that it addresses the issue of legislative response in ensuring greater activism on the part of institutional investors.

Corporate governance and institutional investors - law in India

Financial markets globally are experiencing competitive monetary easing. In this context, India stands as land of opportunities in attracting institutional investors, especially the foreign institutional investors (now called as foreign portfolio investors). The purpose of this paper is to critically analyse corporate laws in India relating to institutional investors in the context of corporate governance. The study reports that institutional investors role is different from that of other investors in ensuring compliance with corporate governance norms. In spite of incentive to encourage institutional investor activism, legal and business hurdles are acting as deterrence to greater institutional investor activism. An implication of this paper is that it addresses the issue of legislative response in ensuring greater activism on the part of institutional investors.

Acquisitions by Family Businesses in Continental Europe and their Differences Compared to Private Equity Investors

This study explores whether family business investors and private equity investors in continental Europe significantly differ from their investment approach and performance. Therefore, we analyse 126 acquisitions of listed Continental European firms by family business investors or private equity firms from the years 2002 to 2012. Although most of the performance differences between both investor groups are not statistically significant, the results fit with the existing evidence on shareholder activism of institutional investors like private equity funds and corporate raiders. However, there are some significant differences with respect to target firm characteristics. Consequently, we suggest to increasingly consider family business investors in the research on shareholder activism in Continental Europe.

Knocking at the Boardroom Door: A Transatlantic Overview of Director-Institutional Investor Engagement in Law and Practice

Under the current context of (re)concentrated ownership, institutional shareholders are expected to play a more active role in corporate settings in making managers more accountable and urging them to favour a long-term view. Calls from institutional investors for engagement with the board have grown and private dialogue with directors is now an important instrument of institutional investor activism. In spite of this favourable trend, director-shareholder dialogue is still problematic. Public disclosure and insider trading rules set legal constraints on board-shareholder engagement. However, the reach of these constraints should not be overstated, as they do not appear to ban outright all private dialogue between directors and shareholders. In this regard, recommendations within corporate governance and stewardship codes, and from practitioners, have played a major role in developing a practical framework for director-shareholder dialogue that seeks to prevent the violation of insider trading and public disclosure rules, and to make dialogue more effective. Against this backdrop, this article will provide a comparative transatlantic overview of recent developments in the area of director-institutional shareholder dialogue in the US and in Europe with the aim of assessing the effective reach of legal constraints on board-shareholder dialogue under current legislation, and considering some practical solutions offered by corporate governance and stewardship codes that could facilitate board-shareholder engagement and enhance its effectiveness.

Informed trading by foreign institutional investors as a constraint on tunneling: Evidence from China

AbstractManuscript TypeEmpiricalResearch Question/IssueThis paper investigates how the trading activities of foreign institutional investors (FIIs) affect the tunneling activities of controlling shareholders in an emerging economy (China).Research Findings/InsightsWe use an unbalanced panel dataset of 167 FIIs with investments in Chinese real estate firms during the period 2003 to 2011, which gives us 1006 firm‐year observations in total. We find strong support for our hypothesis of an inverted U‐shaped relationship between FII trading turnover and the extent of tunneling by controlling shareholders.Theoretical/Academic ImplicationsIn many emerging economies, the institutional environment for investor protection is weak. Powerful controlling shareholders may take the opportunity to extract private benefits via tunneling activities to the detriment of minority shareholders, and informed minority investors may also take advantage of less well‐informed investors. There are thus multiple principal–principal agency conflicts. FIIs are a particularly important group of informed investors. On the one hand, large‐scale aggressive trading by FIIs should drive stock prices to fundamentals, provide market discipline to management, and thus limit tunneling. On the other hand, FIIs may opt to exploit their private knowledge to gain trading profits at the expense of uninformed investors, and implicitly support tunneling. We highlight these potential effects, and demonstrate empirically an inverted U‐shaped relationship between FII trading turnover and the extent of tunneling.Practitioner/Policy ImplicationsTunneling is a serious issue, particularly in emerging economies where the institutional arrangements for minority investor protection are often weak. FII involvement may enhance market discipline, but may also exacerbate the problem, so policymakers need to guard against potential adverse effects. An ownership cap on FII shareholdings is unlikely to be effective, but policymakers might strengthen QFII license revocation policies and issue more licenses to promote competition among FIIs.

Does Hedge Fund 'Activism' Create Long Term Shareholder Value?

Presented at the Annual Meeting of the Center for Corporate Governance, Conference Board of New York, on November 14th, 2014. The presentation is following the publication of two papers by the Institute for Governance of Private and Public Organizations answering the question “Does hedge fund activism create long-term shareholder value?” In the presentation, the question is rephrased to consider whether activist hedge funds are making corporations better for all stakeholders. Thus, a definition of corporate short-termism is provided, and evidence and causes of short-termism are explored. The “soft” activism of institutional investors and the “hard” activism of hedge funds are contrasted. The impact of hedge fund activism is set forth, and a critical review of academic studies purporting to demonstrate the favorable long term effects is presented. Finally, different measures to curtail the influence of these activists are explored.