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We show that the majority of hedge fund activism campaigns occur in clusters by industry and time. Activism waves are explained by poor and deteriorating industry conditions and magnified by the herd behavior of inexperienced funds, but they are not driven by asset liquidity. Activism waves lead to a large increase in the threat to become an activism target. They strongly impact the market for corporate assets as targets as well as peer firms receive more merger bids, increase divestitures and make fewer acquisitions. We estimate that the simultaneous increase in asset sales and decrease in acquisitions in activism waves reduce real asset liquidity for asset sellers by about 35%. The liquidity squeeze produces two effects: transaction prices are reduced, and industry outsiders provide liquidity by purchasing more industry assets. Looking at short-term price pressure and long-run performance, we present evidence that transactions by activist targets are less affected by the reduced asset liquidity than those of other firms.

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