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

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 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.