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

Combining perspectives from the literature on institutional activism and signaling theory, we suggest that a sovereign wealth fund (SWF), owing to its distinctive properties as a government-owned foreign institutional investor, serves as an intermediary signaler, providing cues about host countries’ institutional environment to internationalizing firms. By publicizing its investments and engaging in institutional activism to transform the corporate governance practices in host countries, a SWF signals the institutional quality of host countries, which allows firms to overcome the well-known ‘lemons’ problem in international decisionmaking. We examine the impact of a SWF’s signals on firms’ ownership choices in their foreign acquisitions. Empirical analysis of Norway’s SWF and firms from Norway and Sweden during 1998-2011 shows that firms are more likely to take full equity ownership—indicative of larger commitments—in acquisitions in host countries where Norway’s SWF holds larger investments. The signaling effect of the SWF weakens for conational firms, suggesting a diminishing signal strength with proximity to the signaler due to alternative information channels. Similarly, institutional harmonization between the home and host countries enabled by intergovernmental organizations weakens the signaling effect of SWF investments. Our findings point to a new intermediary signaler and the salience of its signals for firms’ international decision-making. Academy of Management Journal