Blockholder Disclosure Thresholds and Hedge Fund Activism

Abstract

Blockholder disclosure thresholds shape incentives for hedge fund activism, which are jointly determined with real investment and managerial behavior. Uninformed investors value lower thresholds (greater transparency) when the cost of trading against an informed activist outweighs the benefits of the activist's disciplining of management.Conversely, activists may desire disclosure thresholds if their threat of participation discourages managerial malfeasance, which is their source of profits. Hedge fund activism can be excessive: if market opacity sufficiently harms uninformed investors, the costs of reduced real investment outweigh the social benefits from managerial disciplining, and society benefits from lower thresholds.

Does Shareholder Activism Create Value? A Meta-Analysis

“…Activism may thus stifle innovation by reducing research and development (R&D) and other investments that generate long-term value (Bourveau & Schoenfeld, 2017;Maffett et al, 2022). Ordóñez-Calafi & Bernhardt (2022) argue that in some settings, the costs of the reduced investment may outweigh the benefits of managerial disciplining. In addition, activism may turn confrontational, destabilize the company (O'Rourke, 2003) and lead to unintended adverse outcomes that damage the firm's reputation (O'Rourke, 2003) and increase the likelihood of lawsuits (Guo et al, 2021).…”