It appears some institutional investors are aware of activist campaigns before they become public, according to new research.

A working paper by three assistant professors of finance — the University of Northern Iowa’s Ryan Flugum, the University of Rhode Island’s Choonsik Lee and the University of South Carolina’s Matthew Souther — found some institutional investors are persistently downloading information on activist campaigns prior to those activists making disclosures on Schedule 13D forms, which must be filed with the U.S. Securities and Exchange Commission when a person or group acquires more than five per cent of any class of a company’s shares within 10 days of a transaction.

“We’ve been interested in what happens in this 10-day window for a while, but it’s a difficult thing to measure just because there’s not a whole lot of transparency in what’s going on and who’s trading the stock and that sort of stuff,” says Souther. “But then this database of IP addresses that access [the SEC’s Electronic Data Gathering, Analysis and Retrieval System] became available and we realized that we might be able to use that to answer this question of what’s going on in this 10-day window.”

In fact, the researchers were able to use EDGAR because, although the SEC anonymized a portion of the IP address, they did so in a way that it’s still possible to determine ownership. “It’s pretty easy to backwards engineer and figure out who owns the IP address given the information that the SEC has on their website,” he adds.

The researchers found certain IP addresses are accessing information on individual activists’ campaign targets before a 13D is filed. The pattern suggests leaked information from activists to unaffiliated institutional investors that aren’t named in the 13D filings, the paper said.

It also noted that downloading these statements has an effect on markets. Specifically, the paper found, in the presence of informed investors, trading volume increases in the days before the 13D is disclosed and higher returns are seen after a 13D is announced.

So whomever has the information about the 13D could be profiting from it, Souther notes. “Ultimately, we find that when these IP addresses are accessing this information, that’s related to a greater likelihood of the activist pursuing, and a greater likelihood of the activist winning, a proxy contest.”

It looks like a win-win situation for both parties, he adds. “You’ve got some other investor out there that has this information and is using it to make profitable trades and then in return for getting that information the activist gets some additional voting support that makes them more likely to win the campaign.”

The paper’s findings raise some legal concerns, says Souther, because the SEC has investigated firms it thought were combining forces but not disclosing it on 13D forms. However, he notes the situation would depend on whether an explicit agreement was reached.

“If you just wanted to announce to some group of people that you were going to file a 13D, there’s nothing preventing you from doing that legally. Where you cross the line into something illegal is if you give them that information in exchange for voting support. So if you’re telling somebody that you’re about to file a 13D and you’re doing that with the agreement that that other party is going to provide voting support later on in the campaign, that is illegal and the reason it’s illegal is because you made an agreement and that other parties’ ownership needs to be reported in the 13D.”