The Wall Street Stampede: Exit as Governance with Interacting Blockholders, 1994-2011

The asset management industry's growth has led to firms often having multiple institutional blockholders, which has a significant impact on corporate governance through exit strategies. A model has been proposed to illuminate this dynamic, emphasizing the role of open-ended institutional investors like mutual funds in enhancing corporate governance when informed blockholders exit. This model introduces a novel perspective on the influence of mutual funds in shaping corporate governance. Empirical evidence consistent with this framework is presented by examining mutual fund trading around exits by activist hedge funds. The empirical analysis centers on a dataset of 399 firms that underwent activist campaigns ending in exit between 1994 and 2011. Findings support the model's predictions, even after adjusting for unobservable firm-level variations and broader economic conditions. Following exits by activist hedge funds, mutual funds driven by fund flows significantly reduce their holdings in the target company compared to other institutional investors. This divergence in trading behavior is more pronounced when activists exit at a financial loss, campaigns show no clear success, or market reactions suggest liquidity concerns weren't the main driver. To conduct this analysis, data on activist campaigns is merged with institutional holdings information from the Thomson Reuters 13F database and the Morningstar Open-end Mutual Fund portfolio holdings dataset. The activist campaign data is based on Schedule 13D filings and aligns with the data collection methods of previous studies. Trading behavior of other blockholders is tracked using quarterly 13F filings, a requirement for institutional investors managing $100 million or more. The S34 dataset (13F filings) from Thomson Reuters is combined with the Morningstar Open End Mutual Funds database to classify mutual funds throughout the 1994–2013 period.