The Benefits of Friendship in Hedge Fund Activism
59 Pages Posted: 15 Jun 2016 Last revised: 15 Feb 2020
Date Written: April 1, 2018
We use a social network framework to study the alliance building process that involves activists and other institutional investors and the channels that facilitate such interactions. Actively-managed funds whose managers are socially connected to activists are more likely to increase holdings in target stocks during activist campaigns. More importantly, connected investors vote against target management more often, and the effect is more pronounced when they raise their stakes. Connected institutions earn significantly higher returns than non-connected investors, and their presence contributes to activists' success. We rule out alternative explanations such as fund manager ability or similarity in portfolio choices.
Keywords: Hedge fund activism, Social network, Alliance building, Governance
JEL Classification: G23, G34
Suggested Citation: Suggested Citation