Hedge Funds and Shareholder Wealth Gains in Leveraged Buyouts

Abstract:     
This paper examines the effect of hedge funds on target shareholder gains in leveraged buyouts (LBOs). I find that the initial buyout premium is increasing in the preannouncement presence of hedge funds, measured as the fraction of target equity held by hedge funds before the announcement. Using a geographic instrument for the presence of hedge fund, I find that this relationship persists even after controlling for endogeneity. I further show that this effect holds only for active hedge funds and long-term hedge funds, and is stronger for management-led LBOs than for third-party LBOs. Overall, the findings suggest that hedge funds protect target shareholder interests in LBOs by using their hold-out power.

Keywords: Hedge funds, private equity, leveraged buyouts (LBOs), takeovers, shareholder activism, manager-shareholder conflicts

JEL Classifications: G23, G34, G14

Working Paper Series