Leader-Follower Dynamics in Shareholder Activism

Abstract

We propose a theory of coordination and influence among blockholders. Privately informed activists time their trades in sequence to lower acquisition costs, prompting a strategic use of order flows: leader activists create trading gains for their followers, ultimately influencing their willingness to bear greater value-enhancing intervention costs. Through this channel, informed trades can exhibit predictability, in sharp contrast with Kyle (1985,Econometrica53, 1315–1335). We explain how this novel predictability shapes free-rider problems affecting governance, and how it produces price abnormalities analogous to those documented empirically. We also uncover how private information interdependence can be a key catalyst for the mechanism studied.