Sell-Side Analyst Reports and Hedge Fund Activism

Recent literature shows that hedge fund activism creates value for shareholders and substantially changes target firms. Sell-side analysts, however, produce analysis and generate ideas to buy-side clients including hedge funds. We investigate whether and how sell-side analyst reports affect hedge fund activism. We find that sell-side analyst reports issued prior to activist intervention have significantly negative market reactions. We use textual analysis to construct an activism dictionary of intervention objectives and tactics identified in Brav, Jiang, Partnoy, and Thomas (2008). Activism dictionary content in pre-intervention analyst reports is negatively associated with report-date stock returns, suggesting that sell-side research reveals negative activism issues in target firms before intervention. Activism content in pre-intervention reports is also positively associated with activism-date stock returns. The relation holds using termination of brokerage coverage as an exogenous shock. This effect is more pronounced when activism objectives are specific and align between analyst reports and intervention filings. Overall, our results suggest that sell-side analyst reports contribute valuable information to activist hedge fund interventions