Determinants of Institutional Investor Activism: A Test of the Ryan-Schneider Model (2002)

Abstract

Corporate experiences with consequences of the Sarbanes-Oxley Act of 2002 (SOX), changes in the listing standards for the New York Stock Exchange (NYSE) and NASDAQ Stock Market, Inc. (NASDAQ), recent corporate scandals, and the emergence of activist investors have fostered a climate of intense scrutiny of corporate governance structures and activities. The effects of these changes are expected to increase shareholder activism, especially institutional shareholder activism (Whitehouse, 2007). Indeed, the 2007 proxy season reflected increased evidence of shareholder activism (Brewer, 2007). The scholarship on corporate governance since Berle and Means (1932) generally assumed the separation of ownership and control to be an inevitable attribute of public corporations (Bainbridge, 1995), causing the research to focus on the consequences of the separation. The consequences of the separation are generally referred to as agency costs (Jensen and Meckling, 1976) and agency theory been the predominant paradigm for understanding and explaining corporate governance issues. Within the discussion of the consequences of ownership structure, the proper role of institutional investors and the reduction of agency costs has spawned a generation of corporate literature (Garten, 1992: 588). Despite the disincentives of prior and existing constraints against collective action, free-riding by some shareholders (i.e., that all investors will share in the gains generated by the efforts of a single activist investor or small group of activist investors) (Black, 1998) and free-walking (i.e., that rather than expend time and money trying to improve the performance of a company in its portfolio, an institutional investor will just sell the shares of the under-performing company and walk away) (Ingley and van der Walt, 2004), some shareholder activists find that the gains from activism often outweigh its costs (Rubach, 1999). Prior research demonstrated that: (1) many institutional owners are activists (Brown, 1998), (2) their activism is expressed in a variety of forms from confrontational to relational (Ryan and Schneider, 2002; Useem, 1996), and (3) their activism can affect firm performance (Chaganti and Damanpour, 1991). While much been learned about the ways in which institutions attempt to influence governance and the consequences of these attempts, at least one central question remains unaddressed: which institutions are most likely to be activists? To answer this question, this study examines Ryan and Schneider's model (2002) of the antecedents of institutional investor activism. The article proceeds as follows. First, we discuss specific determinants of activism as proposed by Ryan and Schneider (2002) and develop the bases for our hypotheses. Next, we present the sample, data collection, variables, and analytical methods employed to test the hypotheses. This is followed by the results of the analyses. Finally, we discuss the implications of the findings for both researchers and practitioners and address the limitations and additional opportunities for future research. DETERMINANTS OF ACTIVISM Ryan and Schneider (2002) argue that the type of institutional investor determines whether an institutional investor will practice shareholder activism. While other influences are possible, this study examines several determinants of institutional shareholder activism proposed by Ryan and Schneider (2002) that are measurable through survey data, yet parsimoniously capture areas likely to ignite activism: fund size, investment time horizon, performance expectations, pressure sensitivity, legal restraints, and portfolio management (internal versus external) (see Figure I). The research is consistent with a call for investigation of more finely-grained measures of institutional investors by Sundaramurthy et al. (2005). Fund Size Previous research on large investors (e. …

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