Activist shareholders play a central role in modern corporations. Such blockholders range from investors who actively pressure firms to change strategy or structure, to index funds that are largely passive in that they limit themselves to voting. Crucially, in between is a group of hedge funds that have embraced activism as a business strategy in the last decades. Campaigns involving these highly strategic blockholders have become commonplace, often featuring a “lead investor” supported by a group of “follower funds,” each holding a stake too small to control the target firm on its own. This phenomenon—termed “wolf pack activism”—has received considerable attention by practitioners, policymakers and academics, both due to its importance and its rather secretive nature. In fact, while the current regulation permits some degree of communication among blockholders, there are substantial costs for activists who act as a formal group. The key issue is that, from a regulatory standpoint, an organized set of activists is treated as a single entity with a block equal to the sum of its components. In this situation, complying with the requirement of disclosing ownership stakes above 5% would mean that a group necessarily invites undesired competition well before achieving a desired block size, thus making any subsequent block acquisition more costly.

In situations where cooperation is key for the success of activism campaigns—such as when large-cap firms are targeted—but at the same time explicit agreements are not an option, a natural question pertains to how blockholders can coordinate their actions in more tacit ways, understanding that their peers have similar interests and can be influenced too. Our point is that sophisticated investors, such as those actively searching for mispricing opportunities, can use market signals to communicate with other like-minded investors. Since this necessitates some blockholder to act in the financial markets first, the leader-follower structure observed in wolf-pack activism has the potential to emerge. Our work shows that if a leader fund acquires a stake before others, her block accumulation can be heavily affected by the possibility of attracting other investors to join forces: the degree of similarity among activists can be key, in that it can determine whether a leader will acquire smaller or larger stock than when acting in isolation. Further, through these modified incentives to accumulate blocks, we explain how and when the possibility of influencing others can facilitate or hinder activists’ ability to unlock value in firms. And we also shed light on why it can be in the best interest of follower investors to join forces despite knowing that the leader has self-interested motivations.

The starting point is that activism is a very costly endeavor. First, acquiring a meaningful stake is costly: hedge funds often make sizeable purchases when crossing disclosure thresholds—around 1% of shares outstanding, stage at which they typically finalize their blocks. Second, activist campaigns that pressure firms into change can cost millions of dollars. Importantly, these costs reinforce each other: only those with larger stakes will be willing to bear more activism costs because any value that this creates accumulates to more shares. Thus, effective cost management is of utmost importance for activists. From this perspective, by trading first—and fast—leader funds not only avoid undesirable competition that would make block acquisition costly, but they can also use their own trades to spawn profitable mispricing opportunities that other funds can find attractive to exploit. As these followers buy more shares, they develop more skin in the game and so their willingness to spend resources to improve firms increases.

Remarkably, this idea is simultaneously natural and non-trivial. It is natural because it is at the core of profit maximization. To see why, consider two activists, a leader and a follower, each of whom can take a costly action, or exert effort, to improve the value of the firm (e.g., spend resources in a campaign that will unlock value). We posit that the firm’s fundamental share value grows according to the sum of both (e.g., with the total resources spent). The value of the leader’s terminal block then increases by

(Effort of Leader + Effort of Follower) × Size of Leader’s Terminal Block.

This simple accounting yields a clear tradeoff. While a larger block increases the leader’s own incentive to contribute, it also means that the leader has more to gain from the follower’s effort. In fact, because building that block is costly in the first place, the leader may want to sacrifice more ownership—and ultimately share value—if the follower is willing to bear more of the activism costs in exchange.

Consequently, it is natural to expect leader funds to trade not only considering traditional price-impact forces, but also the possibility of incentivizing others to build larger blocks. The subtler point precisely concerns what others infer from the leader’s hypothetical trades. An unusually large purchase leads the market to expect greater effort by the activist, raising the price of the firm’s shares and in turn discouraging the follower from buying shares. Conversely, a small purchase makes the follower skeptical of the leader’s incentives and willingness to create value; there is then little reason to build a larger block.

Similar investors are like-minded not only because they employ similar strategies, but also because they rely on overlapping information, research, and expertise about firms. In a nutshell, not only can they know more about ways to fix certain firms, but they may also better recognize what their peers know about those same firms. As a result, their willingness and ability to intervene can be intertwined: an activist’s desire to intervene in a firm may be indicative of others’ similar intentions. Consider then a leader trading aggressively. By virtue of knowing her own willingness to intervene, the follower only makes a positive inference about the leader’s contribution. The rest of the market, however, is uncertain about both contributions. If the market’s perception is that the activists often have similar intentions, a large trade by the leader also leads investors to expect greater involvement by the follower; as a result, the stock price is inherently more responsive, and so a large trade reduces the mispricing that the follower can exploit. Conversely, if the market expects them to often have differing views, a larger addition by the leader is accompanied by a perception of a smaller subsequent contribution by the follower, resulting in a weaker price response: the leader can confidently buy to make the follower more optimistic.

This means that the leader’s block-acquisition strategy differs from what it would be if influencing other investors were impossible. With enough similarity, the leader can still unlock value, but less than if he built his block alongside the follower for instance. In this case, the leader offloads activism costs on the follower who, in turn, is willing to bear them because the mispricing created makes it profitable to do so. But if their views are not aligned, the leader instead must bear more activism costs herself to entice the follower, ultimately adding more value. More broadly, the familiar collective-action problem among activists depends critically on how similar the activists are. When their expertise and incentives overlap, signaling through trades can crowd out some value-enhancing intervention. When the activists involved are more diverse, however, trading can become an effective mechanism for mobilizing additional activism and improving corporate governance.

It is natural to ask why exactly similar activists would “agree” to this form of coordination if it yields lower firm value relative to other arrangements. The reason is that it can be mutually beneficial. While the leader sacrifices share value, and even trading profits by moving first, offloading activism costs on others means better cost management. On the other hand, the follower can benefit too because she can control block-acquisition costs: due to an increased price impact, these costs would be higher when competing to build stakes alongside the leader. The bottom line is, in this situation, explicit agreements can be replaced by tacit ones: the expectation that an investor will generate market signals that like-minded ones can better exploit will induce these fellow investors to wait; in turn, the anticipation that like-minded investors will react to such signals can prompt leader funds to try to influence them, with the implications just described.