Sell-Side Analysis and Hedge Fund Activism
52 Pages Posted: 31 Jul 2018 Last revised: 3 Jul 2019
Date Written: June 27, 2019
Recent literature has shown hedge fund activism to be an important external corporate governance mechanism. Sell-side analysts, however, produce analysis and generate ideas to buy-side clients including hedge funds. We find that sell-side analyst reports issued before activist intervention are valuable to investors, leading to significantly negative market reactions. We use textual analysis to construct an activism dictionary for intervention objectives and tactics identified in Brav, Jiang, Partnoy, and Thomas (2008). Pre-intervention sell-side reports contain significantly more activism-related language which produces more negative stock market responses after controlling for negative report sentiment. High activism dictionary content in pre-intervention sell-side reports is associated with significantly higher activism-date target stock returns. This effect is stronger for younger hedge funds and when sell-side brokerages are in closer proximity to activist hedge funds. Our results suggest sell-side analysis reveals target firm flaws and contributes to 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: Suggested Citation