News Release

Activist investors achieve higher returns using sell-side analysts’ reports

Rensselaer researcher employs textual analysis to create novel dictionary of financial activism

Peer-Reviewed Publication

Rensselaer Polytechnic Institute

TROY, N.Y. — In an era when investors can easily find information online about company performance, are traditional reports created by sell-side analysts still useful? Research from Thomas Shohfi, assistant professor in the Lally School of Management at Rensselaer Polytechnic Institute, shows that these reports are a valuable resource for activist hedge fund investors which are some of the most sophisticated investors in the financial industry.

“Popular thinking says that sell-side analysts no longer play a role in the investment process,” Shohfi said. “For activist investors, we show that sell-side reports remain an important tool and that sell-side analysts should perhaps focus more time and energy on activism-related issues.”

Investment banks and other securities brokerages employ sell-side analysts to conduct in-depth research on publicly traded companies and summarize their findings and insights in reports that serve as a decision-making resource for the brokerage firm’s clients.

Hedge fund activists are investment firms that accumulate a large block of stock in a company, using that position to influence management and convince other large shareholders to join their cause. Activists can force changes to a firm’s board of directors or alter the course of a company’s business and/or financial practices in order to increase profitability. Any individual or group with an activist agenda that acquires 5% or more of a company’s shares must file a Schedule 13D with the Securities and Exchange Commission (SEC).

Shohfi used these two complex data sources, the analysts’ reports and the SEC Schedule 13D filings, to examine sell-side information production relative to hedge fund activists. He found that sell-side reports contain more activist-related language and more quantitative information months before 13D filings are released.

Shohfi’s research also showed that a higher ratio of increased use of activist vocabulary in sell-side analyst reports relative to 13D filings was associated with greater stock returns after hedge fund activists announced their ownership.

“Sell-side analysts are indirectly contributing to this increase in shareholder value because activist hedge funds see them as a source of idea validation and reinforcing the fund’s internal information production,” Shohfi said.

The study also found that nearly one-third of publicly available letters written by activists to other shareholders, boards of directors, and management following the 13D filings mention specific information used in the sell-side analysis reports.

“If activist hedge funds are directly referencing research from these sell-side analysts in their letters, it’s clear that they believe sell-side analysis still has value. Arguments and proposals in letters backed by sell-side analysis help activist hedge funds capture higher returns for firm shareholders,” Shohfi said. “Sell-side analysts continue to play a role in corporate governance.”

To conduct the review, Shohfi first used textual analysis to develop a dictionary for activism tactics and objectives, a key technique used throughout Shohfi’s core body of research using alternative data as a source of untapped information.

Shohfi was joined in the research paper, — “Do Sell-Side Analysts Play a Role in Hedge Fund Activism? Evidence from Textual Analysis,” — by Rensselaer doctoral program graduate Huimin (Amy) Chen, an assistant professor at the University of Massachusetts Lowell.

About Rensselaer Polytechnic Institute

Founded in 1824, Rensselaer Polytechnic Institute is America’s first technological research university. Rensselaer encompasses five schools, 34 research centers, more than 140 academic programs including 25 new programs, and a dynamic community made up of more than 7,600 students and over 104,000 living alumni. Rensselaer faculty and alumni include more than 155 National Academy members, six members of the National Inventors Hall of Fame, six National Medal of Technology winners, five National Medal of Science winners, and a Nobel Prize winner in Physics. With nearly 200 years of experience advancing scientific and technological knowledge, Rensselaer remains focused on addressing global challenges with a spirit of ingenuity and collaboration. To learn more, please visit

Disclaimer: AAAS and EurekAlert! are not responsible for the accuracy of news releases posted to EurekAlert! by contributing institutions or for the use of any information through the EurekAlert system.