Blockholder Disclosure Thresholds and Hedge Fund Activism

Blockholder disclosure thresholds are under scrutiny due to their impact on the incentives for hedge fund activism, which in equilibrium are jointly determined with real investment and managerial behavior. We set up and study a comprehensive framework of the key mechanisms at play : initial investors in a firm—who value the disciplining effects of activism on management, but incur costs trading with activists who know their own value-enhancing potential ; activists—who value higher thresholds when establishing equity stakes, but incur costs if high thresholds reduce real investment or discourage managerial misbehavior; and firm managers—who weigh private benefits of value-reducing actions against potential punishment if activists intervene. We characterize the optimal thresholds for initial investors, activist funds and society. When managers are unresponsive to threat of activism, initial investors and society value tighter disclosure thresholds than activists. In contrast, activists value tighter thresholds when managerial behavior is responsive to the threat of activism