Power Tussle: Hedge Fund Activists and Short Sellers

We study interactions between activist hedge funds and large short sellers using European data on activist campaigns and mandatory disclosures of large short positions. Large short sellers are associated with a 21% higher likelihood of activist targeting, higher campaign success, and profitability. Using the EU’s 2012 harmonization of short-position disclosure rules as an exogenous shock, we find causal evidence that the regulatory change affected activist targeting. Our evidence is consistent with an information channel: only hedge fund short sellers predict targeting, and the effects are amplified by information aggregation and disclosure novelty. Evidence on bargaining and cost channels is weaker.