An Agency Theory Perspective on Activist Investors and Supply Chain Failures: The Case of Product Recalls

ABSTRACT Navigating failure is a critical part of managing today's supply chains. This study focuses on one prominent type of supply chain failure: product recalls. Despite the negative implications for the firm, its supply chain, and society, some firms are slow to initiate recalls. Drawing on agency theory, the authors examine whether such delays might be mitigated, in part, by a group of stockholders who are increasingly vocal about supply chain failures: activist investors. While most stockholders avoid meddling in firms, activist investors work to bring about change. Research makes clear that firms respond when directly attacked by activist investors, but less is known about possible spillover effects—i.e., whether and to what extent non‐targeted firms respond when activist investors attack other firms. Analyses of data on 5427 medical product recalls reveal that greater stock ownership by activist investors who have attacked other firms is associated with faster recalls, and the spillover effect is stronger for design‐related defects and high‐severity defects that can harm consumers. Overall, the study uncovers an important spillover effect wherein activist investor attacks influence other firms in which they own stock to recall defective products more quickly, thereby benefiting society.