Power Tussle: Hedge Fund Activists and Short Sellers

Tao Li, Pedro A. C. Saffi, and Daheng Yang

♦ We study interactions between activist hedge funds and large short sellers using European data on activist campaigns and mandatory disclosures of large short positions. Large short sellers are associated with a 21% higher likelihood of activist targeting, higher campaign success, and profitability. Using the EU’s 2012 harmonization of short-position disclosure rules as an exogenous shock, we find causal evidence that the regulatory change affected activist targeting. Our evidence is consistent with an information channel: only hedge fund short sellers predict targeting, and the effects are amplified by information aggregation and disclosure novelty. Evidence on bargaining and cost channels is weaker.

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