Investment Decisions, Liquidity, and Institutional Activism: An International Study

Alfredo M. Bobillo, Juan A. Rodriguez Sanz, Fernando Tejerina Gaite

Journal of Business Ethics · 2009 · Volume 87 · Issue 1

Abstract

The activism of institutional investors tends more and more toward the supervision and control of the behavior of the managers of big companies. In this article, we present a model based on the creation of an activism index that lets us evaluate such activism’s effect on the sensitivity of the investment policies of a company in the face of financial variables (such as cash flow and liquidity ratio) and market variables (ownership concentration and value creation index). To test our assertions, we analyze firm-level data for United Kingdom (U.K.), Germany, France, Denmark, and Spain during the period 1995–2004. Our results point to a significant reduction in the sensitivity of company investment decisions in the face of these variables, especially relative to intangible capital, as a result of the neutralizing effect of activism on the high agency costs of free cash flow and on the information asymmetries of the market.

Keywords

institutional activism, firm performance, financial constraints, investment-cash flow sensitivities, corporate investment

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