A Signaling Theory of Institutional Activism: How Norway’s Sovereign Wealth Fund Investments Affect Firms’ Foreign Acquisitions

Combining perspectives from institutional activism and signaling theory literatures, we suggest that an activist sovereign wealth fund (SWF) can serve as an intermediary signaler, providing cues about host countries’ institutional environment to internationalizing firms. By publicizing its investments and engaging in institutional activism, a SWF can signal the institutional quality of host countries to internationalizing firms, thus allowing them to overcome the well-known “lemons problem” in international decision-making. We examine the impact of a SWF’s signals on firms’ ownership choices in their foreign acquisitions. Our empirical analysis of Norway’s socially responsible SWF and firms from Norway and Sweden during 1998–2011 shows that firms are more likely to take larger commitments via full equity ownership in acquisitions in host countries where Norway’s SWF holds larger investments. The signaling effect of the SWF weakens for conational firms, suggesting that proximity to the signaler may generate alternative information channels that diminish the signaling value of foreign investments. Similarly, institutional harmonization enabled by intergovernmental organizations connecting the home and host countries weakens the signaling value of SWF investments. Our findings point to intermediary signaling by activist institutional investors and the salience of their signals for firms’ international decision-making.