Where Do Hedge Fund Activists Trade?

Abstract

Before intervening in corporate governance, hedge fund activists usually acquire a large stake in a firm, and this information is private until they file Schedule 13D. We analyze their choice between the lit exchange and the dark pool. Our model predicts that the market share of the dark pool increases when an activist trades, and it increases more when the value of information is higher. Our evidence indicates that the market share of the dark pool increases 11% when an activist trades, and a one standard deviation increase in the value of information increases the dark pool share by 17%.

Keywords: hedge fund activism, dark pool, price manipulation, rational expectation equilibrium

JEL Classification: G12, G34