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September 2022 Revised May 2024
JEL classification: D82, G14, G23
Authors: Doruk Cetemen, Gonzalo Cisternas, Aaron Kolb, and S. Viswanathan
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.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Gonzalo Cisternas
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Aaron Kolb
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
S. Viswanathan
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
