Cornell Law Review


Hedge fund activism


We develop and apply a new and more rigorous methodology by which to measure and understand both informed trading and the agency costs of hedge fund activism. We use quantitative data to show a systematic relationship between the appointment of a hedge fund-nominated director to a corporate board and an increase in informed trading in that corporation's stock (with the relationship being most pronounced when the fund's slate of directors includes a hedge fund employee). This finding is important from two different perspectives. First, from a governance perspective, activist hedge funds represent a new and potent force in corporate governance. A robust debate continues as to whether activist funds reduce the agency costs of corporate governance, but this is the first attempt to investigate whether activist hedge funds also impose new agency costs through widened bid-ask spreads and informed trading. Second, although insider trading is almost universally condemned, it has only been studied in individual cases. Using instead a quantitative approach, we develop a tool that enables regulators (civil and criminal) to identify suspicious trading patterns: both to demonstrate such a pattern and to map these new agency costs, we assembled a data set of 475 settlement agreements, between target companies and activist funds relating to the appointment of fund-nominated directors, from 2000 to 2015, in order to focus on what happens once such a fund-nominated director goes on the board.