Voice and Action: Sell-Side Analysis and Hedge Fund Activism

55 Pages Posted: 31 Jul 2018 Last revised: 3 Dec 2018

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: November 7, 2018

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. Using a propensity score matched sample, we examine sell-side analyst activity around hedge fund activism. We find that declining trends in analyst coverage begin in the year before hedge fund intervention and continue afterward. Stock market responses to analyst reports are negative before hedge fund intervention but revert to positive after. We introduce a new textual analysis dictionary to identify the activism objectives and tactics of Brav, Jiang, Partnoy, and Thomas (2008) within analyst reports and show pre-event sell-side reports contain significantly more language related to subsequent activism. Higher activism dictionary content in sell-side reports is correlated with activism-date target stock performance and predicts multiple activist interventions. Our results suggest that critical voice of sell-side analysis reveals coverage 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, Voice and Action: Sell-Side Analysis and Hedge Fund Activism (November 7, 2018). Available at SSRN: https://ssrn.com/abstract=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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