Sample of social networks

To identify social ties between a lead activist and other institutional investors, we re- strict our sample of institutions to two types of actively managed funds: non-activist institutions and non-campaign activist funds. Non-activist institutions include non- activist hedge funds and growth-oriented mutual funds.5 Growth-oriented mutual funds seek maximum capital gains and have comparatively high risks, thus share some features of hedge funds (Klein and Li, 2015). We exclude other types of mutual funds because these investment firms are well diversified, and their investment in a target company is less likely to be affected by activism events. To ensure tractabil- ity for manual collection of social ties between the lead activist and institutional investors, we restrict non-activist hedge funds to those with an average portfolio value above $5 billion over the past five years prior to the campaign quarter. Fur- ther, in order to study institutions’ quarterly changes in ownership in the target

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Using the Thomson Reuters database, we obtain 13F filings for all investment firms that are categorized as 4 or 5 in the Thomson Reuters database. These investmeampaign activist funds, the former consisting of non-activint firms primarily are hedge funds or similar types of investing firms. We label this group of investors “non-activist hedge funds.” Using the Thomson Reuters database, we obtain S12 filings for mutual funds with investment objective codes equal to 2, 3 and 4, the database’s indicators for Aggressive Growth, Growth and Growth & Income funds, respectively. We make sure that non-activist hedge funds and growth-oriented mutual funds are mutually exclusive. We then aggregate individual funds’ holdings at the fund manager level.

stock before the activist disclosure, for each campaign we drop the institutions that report holdings in the Thomson Reuters database for less than two consecutive quarters before the campaign quarter.

Our sample of institutions consists of 454 unique non-activist institutions and 282 unique non-campaign activist funds. The average number of all institutions for one campaign is 467, with an average of 276 non-activist funds, and 191 non- campaign activist funds.

Procedure for identifying social connections

Our primary data source to identify social connections between each institution and the lead activist is BoardEx. BoardEx collects biographical and relationship data for directors and senior executives in public and private companies across the globe. We locate funds – lead activists and other institutions – in BoardEx by manually searching variations of their names.6 _{For all funds identified in BoardEx,}

the top four positions are Managing Director, Vice President, Director, and Portfolio Manager. A lead activist and an institution are defined to be socially connected if any top official from the activist has a social relationship with a top official from the institution. From our original sample, we drop 101 activists and 125 institutions that have never had any recorded officials in BoardEx.

The two main social relationships identified by BoardEx are school ties (when two people attended the same university at the same time), and employment ties (when two people worked in the same organization at the same time, such as sitting on the Board of Directors of a company). Other ties include club membership and charity work.

To mitigate endogeneity concerns, we include only “past ties” that have been established well before the activist launches its campaign. Reverse causality would be a concern if we were to include ties created during or after the campaign year, because the activist often gains board seats during the campaign, which may create new ties with certain institutions via serving on the board. Past ties between the activist and other institutions, however, are relatively exogenous to the initiation of an activist campaign, thus facilitating causal interpretation.

Our independent variable of interest, connection to lead activist, takes a value of 1 if at least one relationship established in the past between two funds’ key personnel is still active during the campaign quarter. Otherwise, this dummy variable equals 0. During our sample period a fund may experience turnover of its key personnel. We thus deem a relationship with another fund to be severed if a key connected person leaves before the campaign year and there is no other active relationship between existing personnel pair of the two funds.

A simple example illustrates social connections between two funds. Ronald H. McGlynn and Mario J. Gabelli both graduated from Columbia Business School in 1967. In 1973, Ronald H. McGlynn co-founded Cramer Rosenthal McGlynn, LLC (“CRM”), a $7 billion hedge fund. In 1977, Mario J. Gabelli founded Gabelli

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For individual funds that do not exist in BoardEx, we use information of directors and senior executives at their fund families.

Asset Management Company Investors (“GAMCO Investors”), a prominent activist hedge fund. The “start time” for the tie between CRM and GAMCO Investors is thus 1977. Both were still working at the two funds as of May 2016. Therefore, for the 2007 activism event launched by GAMCO Investors in Aquila, Inc., an electricity and natural gas distribution firm, CRM was a connected fund. For CRM, the dummy variable, connection to lead activist, equals 1 for this event. A more rigorous algorithm is shown in Appendix A.

It is worth noting that our method of defining the variable connection to lead activist is conservative. We do not sum all the personal ties between any two funds. Large institutions typically have more key employees, thus the summation may simply capture the “size effect.” Another potentially more important reason is that BoardEx may not cover all personnel working at all institutions during our sample period. Adding up all the personal ties between two funds thus could further introduce bias. Nevertheless, using the summation of all the personal ties between two funds yields similar results to our main findings.