Importing Activists: Determinants and Consequences of Increased Cross-border Shareholder Activism

Abstract

We use a comprehensive sample of nearly 7,000 shareholder activism campaigns across 56 countries to examine how corporate governance regulations interact with activism to drive changes in real corporate-sector outcomes. We develop a novel country-level framework of regulatory characteristics that serve as necessary precursors for minority shareholders to influence firm governance. We find that the incidence of both foreign and domestic activism, as measured by the number of campaigns, increases by over 60% (95%) following reforms that increase shareholder voting rights (board independence). Using these shareholder-empowering changes to governance regulation as shocks to the threat of activism, and the presence of independent institutional investors to identify high-activism-risk firms, we find that firms facing a high threat of activism (including non-targeted firms) increase profitability, reduce investment, and increase payouts. These effects are concentrated in countries where the preexisting corporate governance regulations are weaker and the level of activism was relatively low; we find little evidence of significant changes in countries with historically higher levels of activism. Overall, our results suggest that, when shareholder-empowering governance regulations give activists a way to gain access to untapped markets, they can serve as catalysts for widespread changes in corporate activities.

Keywords: Shareholder Activism, Corporate Governance, Regulation, Real Effects

JEL Classification: F55, G38, K22, M48