13D Filings Research Articles

Shrinking the 13D disclosure window will benefit non-activist investors

PurposeThis study aims to examine the Securities and Exchange Commission’s final rule in Modernization of Beneficial Ownership Reporting, which reduced the time for significant public company shareholders to file Schedule 13D (effective February 5, 2024). The authors corroborate prior results under the historic 10-day maximum reporting regime and provide updated academic analysis regarding how the five-day deadline between the “triggering” event, accumulating 5% of the outstanding shares and public disclosure of that event will affect abnormal returns.Design/methodology/approachThis empirical archival study uses publicly available data.FindingsThe analyses show that changing from a 10-day to a 5-day Schedule 13 disclosure window will reduce activist investors’ opportunity to profit by legally delaying the filing of Schedule 13D. These excess returns for delay exist regardless of the profitability or size of the target firm or the shareholder’s disclosed reason for filing. The authors conclude that accelerating the timing of the disclosure window is an improvement that is in the best interest of the general investing public.Originality/valueTo the authors’ knowledge, this is the only academic study of Schedule 13D filings to include the postpandemic period. As such, the authors establish an updated “baseline projection” for expectations regarding how the Modernization final rule will impact activist investors and stock returns under a five-day reporting regime. In addition, the authors measure and test abnormal returns after considering differences between “triggering” events and filing dates of Schedule 13Ds in the sample rather than grouping all filings. This approach allows the authors to account for the time difference between the triggering event and the filing date.

Shining a Light in a Dark Corner: Does EDGAR Search Activity Reveal the Strategically Leaked Plans of Activist Investors?

AbstractWe provide evidence of a network of information flow between activists and other investors prior to 13D filings. We match EDGAR search activity to investor IP addresses, identifying specific investors who persistently download information on an individual activist’s campaign targets in the days prior to that activist’s 13D disclosures. This outside investor’s knowledge of pending activist campaign plans seems to benefit both parties: the informed investor, unnamed in the 13D, increases its holdings in the targeted stock prior to the price surge upon 13D disclosure, while the activist earns voting support that increases their likelihood of pursuing and winning a proxy fight.

Hedge fund activism and internal control weaknesses

PurposeThe aim of the paper is to investigate the associations between hedge fund activism and corporate internal control weaknesses.Design/methodology/approachIn this paper, the authors identify hedge fund activism events using 13D filings and news search. After matching with internal control related information from Audit Analytics, the authors utilize ordinary least square (OLS) and propensity score matching (PSM) to analyze the data.FindingsThe authors find that after hedge fund activism, target firms report additional internal control weaknesses, and these identified internal control weaknesses are remediated in subsequent years, leading to better financial-reporting quality.Originality/valueThe findings indicate that both managers and activists have incentives to develop a stronger internal control environment after targeting.

Do Sell‐Side Analysts Play a Role in Hedge Fund Activism? Evidence from Textual Analysis*

ABSTRACTWe investigate variation in information production by sell‐side analysts and its potential role in hedge fund activist intervention, an important external corporate governance mechanism that creates shareholder value. Using textual analysis to derive an activism dictionary from intervention objectives and tactics, we find substantially more activism content in pre‐intervention analyst reports of target firms than propensity score matched control firms. Activism content is associated with more detailed reports containing more quantitative information. Target firm intervention‐date stock returns are significantly higher when activist intention (13D) filings are supported by reports with more general and objective‐specific activism content. Of activists' public letters to stakeholders, 31.9% directly mention sell‐side analysis, amplifying the association between target returns and analyst report information. The relationship between analyst information and activism returns is robust to using brokerage closures as an exogenous shock and is consistent with analyst incentives. Activist funds with no prior disclosed position in target firms and more experienced funds capture higher returns from sell‐side information. Overall, our results suggest sell‐side analysts play a significant informational role in supporting hedge fund activism.

A Dataset for Blockholders in US-Listed Firms

Abstract I introduce a new dataset for research on institutional and individual blockholders in US-listed firms. As of June 2021, the dataset contains 758,666 parsed Form 13D and 13G filings from November 1993 to May 2021, sourced from SEC EDGAR. Due to the semi-structured nature of these filings, a comparable dataset was not available for research before.

Margin trading shareholder activists

ABSTRACT We examine margin trading activists that we define as shareholders that are identified by Schedule 13D filings and state therein that they may use margin borrowings to finance their holdings. We find that arrivals of margin trading activists are associated with positive target announcement returns compared to those of non-margin trading activists. This indicates that margin trading activists’ arrivals are perceived as signals of positive future target firm performance. Moreover, we find that their investment horizon is likely contingent on how long they have invested in the targets prior to their filings or whether markets react positively to their arrivals.

Why do investment banks buy put options from companies?

Companies have collected billions in premiums from privately sold put options written on their own stock. It is puzzling that counterparties, investment banks, would agree to make such transactions with better-informed companies which have extraordinary ability to time the market as documented by Jenter et al. (2011). To resolve this puzzle, we develop a model that shows that investment banks, by offering to buy put options from better-informed parties, receive private information about issuing companies. Our model also incorporates the practice of firms (such as Microsoft) of sometimes repurchasing their own put options and thus providing additional private information to investment banks. Empirically, we find support for our theory from an abnormal 9% increase in the stock prices and a 40% increase in the trading volumes around the put sales. Examination of 13D filings reveals that trading by upper management insiders cannot completely account for the change in volume.

Informed Trading in the Stock Market and Option-Price Discovery

AbstractWhen activist shareholders file Schedule 13D filings, the average stock-price volatility drops by approximately 10%. Prior to filing days, volatility information is reflected in option prices. Using a comprehensive sample of trades by Schedule 13D filers that reveals on what days and in what markets they trade, we show that on days when activists accumulate shares, option-implied volatility decreases, implied volatility skew increases, and implied volatility time slope increases. The evidence is consistent with a theoretical model where it is common knowledge that informed trading occurs only in the stock market and market makers update option prices based on stock-price and order-flow dynamics.

The Strategic Drivers of Proactive Investor Attention

Publicly-listed companies increasingly face pressures from the public equity market. Recently these market pressures have arisen from activist hedge funds who buy blocks of shares in a firm’s stock with the intent to intervene in the firm’s management. Despite the growing presence of activist investors, the nature of strategies that garner attention from these investors is not well known. This study uses the theoretical lens of a lemons problem in strategies, arising from information asymmetry and adverse selection issues in public equity markets, to argue that as companies’ strategies are incongruent with the expectations of market participants and therefore more difficult to understand, they are prone to public market dissent and likely to garner more attention from investors seeking involvement in management. Using a hand-collected proprietary database of SEC 13D filings and proxy statements, we find that companies’ increasing levels of strategic incongruence tend to be positively associated with attracting proactive investor attention.

The preventive effect of hedge fund activism: investment, CEO compensation and payout policies

PurposeThe purpose of this paper is to examine the effectiveness of hedge fund activism (HFA) in preventing corporate policy deviations.Design/methodology/approachThis paper identifies HFA interventions through a hand-collected sample of Schedule 13D filings between 1994 and 2016, and uses mechanical mutual fund fire sales as the instrument variable (IV) for the likelihood of such interventions. Armed with the instrument, this paper estimates firm's distribution, managerial compensation and investment policies in response to a change in the perceived likelihood of HFA interventions.FindingsAn increase in the HFA intervention likelihood leads to increases in shareholder distribution, decreases in CEO pay and investments and increases in operating performance. Compared to the sample average, a one standard deviation increase in the intervention likelihood leads to a 9.29% increase in the firm's payout ratio, a 7.42% decrease in CEO compensation, a 2.67% decrease in capital expenditures and a 4.96% decrease in R&D expenses. These changes are consistent with the threat of intervention curbing managerial empire-building behaviors and improving firm operation. The relationships are causal, significant and robust to a variety of alternative specifications and sample divisions.Originality/valueResults of this paper suggest that as a mechanism for corporate governance, the threat of HFA is effective in preventing corporate policy deviations. They also demonstrate a stronger and broader impact of HFA on corporate policy than previously documented. By showing that HFA is an effective and viable mechanism for corporate governance, this study allows policymakers to make more informed decisions to whether increase hedge fund regulations or not.

Shining a Light in a Dark Corner: EDGAR Search Activity Reveals the Strategically Leaked Plans of Activist Investors

We provide evidence of a network of information flow between activists and other investors prior to 13D filings. We match EDGAR search activity to investor IP addresses, identifying specific investors who persistently download information on an individual activist’s campaign targets in the days prior to that activist’s 13D disclosures. This apparent leaking of activist campaign plans seems to benefit both parties: the informed investor, unnamed in the 13D, increases its holdings in the targeted stock prior to the price surge upon 13D disclosure, while the activist earns voting support that increases their likelihood of pursuing and winning a proxy fight.

The anatomy of block accumulations by activist shareholders

We conduct a large-sample analysis of investor activism in the US based on all 13D filings from 2001 to 2016. While hedge funds represent the largest filer group, the sample contains a diverse set of other activist shareholders. This raises the question to what extent other investors perform a governance role similar to hedge funds. Based on target firms' outcome variables, like announcement returns of activist campaigns and changes in operating performance measures, we find surprisingly few differences. However, hedge funds play a special role when it comes towards takeovers. They stimulate monitoring activities among relatively larger firms and they help to set payout policies.

Margin Trading Activists

We examine margin trading activists that we define as shareholders that are identified by Schedule 13D filings and state therein that they may use margin borrowings to finance their holdings. We find that arrivals of margin trading activists are associated with positive target announcement returns compared to those of non-margin trading activists. This indicates that margin trading activists’ arrivals are perceived as signals of positive future target firm performance. In addition, we find that margin trading activists more likely hold on their investments for a longer term.

Using long short‐term memory neural networks to analyze SEC 13D filings: A recipe for human and machine interaction

SummaryWe implement an efficient methodology for extracting themes from Securities Exchange Commission 13D filings using aspects of human‐assisted active learning and long short‐term memory (LSTM) neural networks. Sentences from the ‘Purpose of Transaction’ section of each filing are extracted and a randomly chosen subset is labelled based on six filing themes that the existing literature on shareholder activism has shown to have an impact on stock returns. We find that an LSTM neural network that accepts sentences as input performs significantly better, with precision of 77%, than an alternately specified neural network that uses the common bag of words approach. This indicates that both sentence structure and vocabulary are important in classifying SEC 13D filings. Our study has important implications, as it addresses the recent cautions raised in the literature that analysis of finance and accounting‐related text sources should move beyond bag‐of‐words approaches to alternatives that incorporate the analysis of word sense and meaning reflecting context.

The Anatomy of Block Accumulations by Activist Shareholders

We conduct a large-sample analysis of investor activism in the US based on all 13D filings from 2001 to 2016. While hedge funds represent the largest filer group, the sample contains a diverse set of other activist shareholders. This raises the question to what extent other investors perform a governance role similar to hedge funds. Based on target firms' outcome variables, like announcement returns of activist campaigns and changes in operating performance measures, we find surprisingly few differences. However, hedge funds play a special role when it comes towards takeovers. They stimulate monitoring activities among relatively larger firms and they help to set payout policies.

Where Do Hedge Fund Activists Trade?

We analyze how a large informed trader chooses between a lit exchange and a dark pool. We show that (1) the market share of the dark pool increases when the informed trader trades; (2) the market share of the dark pool increases more when the value of information is higher; and (3) price discovery decreases with the value of information. We find empirical support for these predictions using trades from activists reported in Schedule 13D filings. A one-standard-deviation increase in the value of an activist’s information increases the dark pool’s market share by 5.8% and reduces price discovery by 9.7%.

Voice and Action: Sell-Side Analysis and Hedge Fund Activism

We investigate variation in information production by sell-side analysts and its potential role in hedge fund activist intervention, an important external corporate governance mechanism that creates shareholder value. Using textual analysis to derive an activism dictionary from intervention objectives and tactics, we find substantially more activism content in pre-intervention analyst reports of target firms than propensity score matched control firms. Activism content is associated with more detailed reports containing more quantitative information. Target firm activism-date stock returns are significantly higher when 13D filings are supported by reports with more general and objective-specific activism content. 31.9% of activists’ public letters to stakeholders directly mention sell-side analysis, amplifying the association between target returns and analyst report information. The relationship between analyst information and activism returns is robust to using brokerage closures as an exogenous shock, is consistent with analyst incentives, but is inconsistent with a “quid pro quo” explanation. Activist funds with no prior disclosed position in target firms and more experienced funds capture higher returns from sell-side information. Overall, our results suggest sell-side analysts play a significant informational role supporting hedge fund activism.

Are institutional investors with multiple blockholdings effective monitors?

We examine whether institutions’ monitoring effectiveness is related to the number of their blockholdings. We find that the number of blocks that a firm's large institutions hold is positively associated with forced chief executive officer (CEO) turnover-performance sensitivity, abnormal returns around forced CEO turnover announcements and 13D filings, and changes in firm value. These results are particularly evident when institutions have multiple blockholdings in the same industry, when they have activism experience, or when they have long-term blockholdings in their portfolio firms. Our results suggest that information advantages and governance experience obtained from multiple blockholdings are important channels through which institutions perform effective monitoring.

Geographic concentration of institutions, corporate governance, and firm value

We examine the impact of geographic concentration of institutional investors on corporate governance and firm value. We find that firms whose large institutions are closely located to each other experience more shareholder-coordinated activities before Schedule 13D filings, more concerted proxy votes against management proposals, higher forced CEO turnover-performance sensitivity, higher returns around CEO turnover announcements and Schedule 13D filings, and larger increases in Tobin's q. These results are robust to using the introduction of new direct airline routes as an exogenous source of variation in proximity. Our results suggest that geographic concentration of investors increases monitoring effectiveness.

Do Hidden Orders Contain Information? Evidence from Cross-Sectional Returns and Corporate Events

Using two unique data sets of NASDAQ stocks, I examine the influence and informational role of hidden orders in the NASDAQ. I find that as much as 20% of trading volume is executed against hidden orders, with 16% of the best bid and ask offers invisible to the public due to these orders. I find that hidden order submitters are: 1) well informed; 2) their hidden orders can generate a 13 bps return at the intraday day level; and 3) the portfolio of stocks with trades heavily executed against hidden buy orders outperforms the portfolio of stocks with trades heavily executed against hidden sell orders over a two-day horizon, but the return predictability disappears over a monthly horizon. Using Schedule 13D filings by hedge funds as informative corporate events, I find that executed hidden order imbalances increase before the events, consistent with the notion that informed traders use hidden orders. .