Quid Pro Quo? Private Information Flows in Shareholder Activism: Evidence from Mutual Fund Families

ABSTRACT This paper hypothesizes that information flows from target firms to large shareholders during activist campaigns and that these flows have governance consequences. Focusing on actively managed mutual fund families, we find that informed trading by large‐holding fund families increases during activist campaigns relative to smaller‐holding fund families invested in the same firms. The effect is stronger for firms that attend more invitation‐only investor events, face greater threats from activist campaigns, and are harder to value. Consistent with information flowing from management to large‐holding fund families, the effect strengthens when Regulation Fair Disclosure enforcement is lax and when the information is favorable to the firm. Furthermore, the increased information advantage is associated with more management‐friendly voting behavior by these investors and a higher likelihood of target firms winning activist campaigns and retaining board seats. Overall, our findings are consistent with a potential quid pro quo in which investors’ access to information from management is associated with more pro‐management behavior.