Sell-Side Analysis and Hedge Fund Activism

57 Pages Posted: 31 Jul 2018 Last revised: 21 Mar 2019

See all articles by Huimin Chen

Huimin Chen

Rensselaer Polytechnic Institute (RPI) - Department of Finance and Accounting

Thomas Shohfi

Rensselaer Polytechnic Institute (RPI) - Department of Finance and Accounting

Date Written: March 16, 2019

Abstract

Recent literature has shown hedge fund activism to be an important external corporate governance mechanism. Sell-side analysts, however, provide idea generation and analysis to buy-side clients including hedge funds. We find that pre-intervention analyst reports are valuable to investors, leading to negative stock market reaction. We use textual analysis to introduce a new dictionary to identify the activism objectives and tactics of Brav, Jiang, Partnoy, and Thomas (2008) within analyst reports. We show that pre-intervention sell-side reports contain significantly more language related to subsequent activism. Higher activism dictionary content in pre-intervention sell-side reports is positively correlated with activism-date target stock performance and predicts multiple activist interventions. Our results suggest that critical voice of sell-side analysis reveals target firm flaws that influence subsequent hedge fund intervention outcomes.

Keywords: Analysts, Buy-Side, Hedge Fund Activism, Hedge Funds, Sell-Side, Shareholder Activism

JEL Classification: G10, G20, G23, G29, M41

Suggested Citation

Chen, Huimin and Shohfi, Thomas, Sell-Side Analysis and Hedge Fund Activism (March 16, 2019). Available at SSRN: https://ssrn.com/abstract=3223333 or http://dx.doi.org/10.2139/ssrn.3223333

Huimin Chen

Rensselaer Polytechnic Institute (RPI) - Department of Finance and Accounting ( email )

Pittsburg Building 2000
110, 8th street
Troy, NY 12180
United States

Thomas Shohfi (Contact Author)

Rensselaer Polytechnic Institute (RPI) - Department of Finance and Accounting ( email )

Pittsburgh Building
110 8th street
Troy, NY 12180
United States

HOME PAGE: http://shohfi.com/

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