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Mar 03, 2022

Sell-side reports play important role in building case for activism, study suggests

Nearly a third of activist letters include reference to sell side

Sell-side reports play an important role in building the case for hedge-fund activism against public companies, according to recently published research.

The authors, Amy Chen of Manning School of Business and Thomas Shohfi of Lally School of Management, created an ‘activism dictionary’ based on the objectives and tactics of activist hedge funds. Next, they reviewed sell-side reports produced on activist targets, searching for terms contained in the dictionary.

The researchers find that pre-intervention sell-side reports contain ‘significantly more activism dictionary content’ than reports on control firms. Pre-intervention reports also tend to be longer and contain more quantitative information.

In addition, the study says there are positive links between the amount of activism-related content produced by sell-side firms and the intervention-date equity returns of the target company.

‘These reports do not necessarily call for activism – something we know most firms don’t want to be targets for – but contain content relevant to activism objectives and targets,’ Shohfi tells Corporate Secretary sister publication IR Magazine. ‘IR reps who are aware of these issues ex-ante will be better prepared in helping management engage with activists.’


The research also finds more direct evidence of hedge funds relying on sell-side notes.

Chen and Shohfi reviewed activist letters written to boards or other shareholders following a Schedule 13D filing, which investors must submit when their stake in a company hits 5 percent. They find nearly a third (31.9 percent) of these letters mention sell-side analysis.

‘Activists can use what the sell side has said previously as external confirmation that management’s policies need correction, making it more difficult if IR seeks to refute activists’ claims,’ Shohfi explains.

Although activist campaigns pose tough challenges, target companies received a boost this month when the SEC proposed modernizing Schedule 13D filings, a move that would make it harder for activists to quietly build stakes.

The US regulator has proposed shortening the disclosure deadline for a 5 percent stake from 10 days to five and including certain derivatives in the calculation of an investor’s position.