Predisclosure Accumulations by Activist Investors and Price Impact of Trading

Abstract

This study presents novel, robust evidence on the effect of price impact of trading, or Kyle’s lambda, on activist hedge funds’ predisclosure ownership accumulations. 1 We find that hedge fund investors are less likely to target illiquid firms; upon targeting an illiquid firm, activists choose private transactions to limit the price impact of their trades; upon doing open market transactions, the activist investors buy more shares of those firms with liquid stock. Our study suggests that market impact can be a factor with significant implications for shareholder activism, and more generally, corporate governance.