Leader-Follower Dynamics in Shareholder Activism

Esat Doruk Cetemen, Gonzalo Cisternas, Aaron Kolb () and S Viswanathan ()
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Aaron Kolb: https://kelley.iu.edu/faculty-research/faculty-directory/profile.html?id=KOLBA

No 1030, Staff Reports from Federal Reserve Bank of New York

Abstract: Motivated by the rise of hedge fund activism, we consider a leader blockholder and a follower counterpart who first trade in sequence to build their blocks and then intervene in a firm. With endogenous fundamentals and steering dynamics, the leader ceases to trade in an unpredictable way: she buys or sells to induce the follower to acquire a larger block and thus spend more resources to improve firm value. Key is that the activists have correlated private information—initial blocks, firms' fundamentals, or their own productivity—so that prices either overreact or underreact to order flows. We link the model's predictions to observables through deriving measures of “abnormal” prices analogous to those documented in empirical studies. The model explains how trades and prices can be used to coordinate non-cooperative attacks, and how block interdependence can be a key factor in the success of multi-activist interventions.

Keywords: activism; insider trading; Blockholding; hedge funds (search for similar items in EconPapers)
JEL-codes: D82 G14 G23 (search for similar items in EconPapers)
Pages: 61
Date: 2022-09-01
New Economics Papers: this item is included in nep-gth and nep-mst
Note: Revised May 2024. Previous titles: “Activist Manipulation Dynamics” and "Activist Trading Dynamics"
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Working Paper: Leader-Follower Dynamics in Shareholder Activism (2023)
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