We study governance when shareholders vote and can also buy or sell shares. We find that voting for the policy that one believes is better for the firm maximizes portfolio value only when pivotal; otherwise, it is better to vote against one’s information, distort the market, and then trade at the distorted price. Equilibrium voting informativeness balances these forces and is demonstrably low. As the number of shareholders grows, the probability of making the correct decision becomes lower than the informational quality of just one shareholder’s private signal. Despite this, shareholders extract information rents from trading and thus obtain additional value from their private information. These effects are related to the level of direct information leakage in the market. The predicted patterns of trading and market volatility help reconcile several debates.

Corporate insiders often become aware of hedge fund attention prior to a 13D filing. We find abnormal buying activity by insiders in the months leading up to hedge fund 13D filings. Whereas 13D announcement abnormal returns are 7.72 %, profits to insiders who buy average 12.09 %. Insider buying is not linked to common firm characteristics that predict activist targeting. Our findings indicate that insiders are benefiting from private knowledge that their firm has become the focus of hedge fund activism, and sometimes this knowledge comes directly from the activist. However, insiders largely refrain from trading when there is formal communication with the activist. Profits to insiders who buy when there are no talks prior to the 13D filing are 14.49 %, triple the amount for insiders who have had early talks with the hedge fund. Insider trading is linked to indicators of poor corporate culture, but not related to outcomes of activism campaigns.