FOLLOW THE MONEY: INSIDER TRADING AND PERFORMANCE OF HEDGE FUND ACTIVISM TARGETS

Hedge fund activism announcements are associated with positive market reactions, and they introduce information asymmetry between insiders and outside investors. Target firm insiders have superior information about the campaign and play an important role in the campaign negotiation. This study examines insiders’ behavior as information asymmetry rises following the campaign announcement. Insiders increase trading in their own firms in response to the campaign announcement. These post-announcement insider trades have additional return predictability than insider trades in other times. Post-announcement insider buys predict higher probabilities of achieving successful campaign outcomes including management turnovers, increases in payout, and corporate restructurings, and higher value of these outcomes. I also find evidence that insiders use campaign resistance and trading interactively to achieve higher wealth gain.