Wolves at the Door: A Closer Look at Hedge Fund Activism

Abstract

Most investor coordination remains undisclosed. I provide empirical evidence on the extent and consequences of investor coordination in the context of hedge fund activism, in which potential benefits and costs from coordination are especially pronounced. In particular, I examine whether hedge fund activists orchestrate “wolf packs,” i.e. groups of investors willing to acquire shares in the target firm before the activist’s campaign is publicly disclosed via a 13D filing, as a way to support the campaign and strengthen the activist’s bargaining position. Using a novel hand-collected dataset, I develop a method to identify the formation of wolf packs before the 13D filing. I investigate two competing hypotheses: the Coordinated Effort Hypothesis (wolf packs are orchestrated by lead activists to circumvent securities regulations about “groups” of investors) and the Spontaneous Formation Hypothesis (wolf packs spontaneously arise because investors independently monitor and target the same firms at about the same time). A number of tests rule out the Spontaneous Formation Hypothesis and provide support for the Coordinated Effort Hypothesis. Finally, the presence of a wolf pack is associated with various measures of the campaign’s success.

Keywords: Wolf pack activism, corporate governance, long-term value, shareholder activism, hedge fund activism, shareholder rights, takeovers, proxy fights, takeover defenses, hedge funds

JEL Classification: G12, G23, G32, G34, G35, G38, K22