Activist investor disclosures and firms' information environments

Abstract

When investors receive credible news about a firm, they revise their valuations of that firm upward or downward depending on the nature of that news. This phenomenon is observed empirically in a variety of situations, including investors' reactions to the disclosures made by analysts and journalists. In this study, we examine a new setting where large activist investors make public disclosures about their target firms that suggest operational and governance fixes that are likely to be followed given the investor's influence over management. Using a hand-collected dataset of these disclosures, we find that these disclosures are significantly associated with positive abnormal returns, decreased bid-ask spreads, and increased disclosure at the target firms. Additional validation tests suggest that our positive returns results are justified as the target firms do in fact improve their performance and implement governance changes ex post. Overall, our findings provide some of the first evidence that activist investors can directly shape a firm's information environment with their own public disclosures.

Keywords: Activism; Corporate Disclosure; Corporate Governance; Information Asymmetry

JEL Classification: D21, G30, G32, G34, K22, L22