Wolves at the Door: A Closer Look at Hedge Fund Activism

Some commentators attribute the success of hedge fund activism to the support offered by other investors, many of whom are thought to accumulate stakes in the target firms before the activists‘ campaigns are publicly disclosed. This phenomenon is commonly referred to as ―wolf pack‖ activism. This paper explores three research questions: Is there any evidence of wolf pack formation? Is the wolf pack formed intentionally (by the lead activist) or is the result of independent activity by other investors? Does the presence of a wolf pack improve the outcome of the activist‘s campaign? First, consistent with wolf pack formation, I find investors other than the lead activist accumulate significant share-holdings before public disclosure. Second, these share accumulations are more likely to be mustered by the lead activist rather than occurring spontaneously. Notably, for example, the other investors are more likely to be those who had a prior trading relationship with the lead activist. Third, the presence of a wolf pack is associated with a greater likelihood that the activist will achieve its stated objectives (e.g., will obtain board seats) and higher future stock returns over the duration of the campaign.