Sell-Side Analysis and Hedge Fund Activism

52 Pages Posted: 31 Jul 2018 Last revised: 3 Jul 2019

See all articles by Huimin (Amy) Chen

Huimin (Amy) Chen

University of Massachusetts Lowell - The Robert J. Manning School of Business

Thomas Shohfi

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

Date Written: June 27, 2019

Abstract

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

Chen, Huimin (Amy) and Shohfi, Thomas, Sell-Side Analysis and Hedge Fund Activism (June 27, 2019). Available at SSRN: https://ssrn.com/abstract=3223333 or http://dx.doi.org/10.2139/ssrn.3223333

Huimin (Amy) Chen

University of Massachusetts Lowell - The Robert J. Manning School of Business ( email )

One University Avenue
Lowell, MA 01854
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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