Portfolio spillover of institutional investor activism and investment efficiency: International evidence

Institutional shareholder activism, once primarily viewed as a U.S. phenomenon, has gone global as institutional investors around the world are becoming increasingly vocal and aggressive in exercising their rights to unlock value. While numerous studies indicate that institutional investor activism significantly contributes to more efficient strategic actions and improves the post-intervention performance of targeted portfolio firms, its impact on non-targeted portfolio constituents remains less understood. Using 5,608 shareholder activist campaigns and firm-level data from 29 countries, this paper investigates the portfolio spillover effect of institutional investor activism on the investment efficiency of non-target portfolio firms. We argue that institutional investors with recent activism experience indirectly influence non-target portfolio firms to adopt efficient investment decisions to avoid becoming targets of activism. Our study explores the portfolio spillover effect of institutional investor activism on investment efficiency within an international context to address two related questions. First, we examine whether the managerial response of non-U.S. portfolio firms to the potential threat of institutional investor activism is comparable to U.S., where the market for activism is well-developed. Second, by distinguishing between domestic and foreign portfolio spillover effects, we analyze whether activism in overseas target firms exerts indirect disciplining pressure on non-target portfolio firms to improve their investment policies. We find that activist institutional ownership is positively associated with investment efficiency in both U.S. and non-U.S. non-target firms. Our analysis shows that firms reduce overinvestment to preempt the potential threat of institutional investor activism. Moreover, our results highlight the heterogeneity in managerial responses among non-target firms, suggesting that the geographic location of the targeted firms influences how non-targets adjust their investment strategies in response to the activism. We find that ownership by institutional investors who initiate activism at local peers, but not at foreign peers, is positively associated with increased investment efficiency.