Institutional Trading and Hedge Fund Activism
University of North Carolina Kenan-Flagler Business School
Southern Methodist University (SMU) - Edwin L. Cox School of Business; University of North Carolina Kenan-Flagler Business School
April 4, 2016
This paper investigates the role of institutional trading in the emergence of hedge fund activism – an important corporate governance mechanism. We demonstrate that institutional sales raise a firm’s probability of becoming an activist target, and by exploiting the funding circumstances of individual institutions, we establish that such effects occur through a liquidity channel. We also provide additional evidence, highlighting the activist’s attempt to camouflage his purchases among other institutions’ liquidity sales. First, activist purchases closely track institutional sales at the daily frequency. Second, such synchronicity is stronger among targets with lower expected monitoring benefits, suggesting that gains from trading with other institutions supplement these benefits in the activist’s targeting decision. Finally, we find that institutional sales accelerate the timing of a campaign at firms already followed by activists rather than attract attention to unlikely targets. Taken together, our findings offer a novel empirical perspective on the liquidity theories of activism; while activists screen firms on the basis of fundamentals, they pick specific targets at a particular time by exploiting institutional liquidity shocks.
Number of Pages in PDF File: 59
Keywords: Shareholder activism, Corporate governance, Hedge funds, Institutional investors
JEL Classification: G11, G12, G23, G34
Date posted: September 1, 2012 ; Last revised: April 26, 2016
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