The Impact of Hedge Fund Activism on the Target Firm’s Existing Bondholders

53 Pages Posted: 26 Dec 2009

See all articles by April Klein

April Klein

New York University (NYU) - Department of Accounting

Emanuel Zur

University of Maryland - Robert H. Smith School of Business

Date Written: November 21, 2009

Abstract

In contrast to previous studies documenting positive abnormal returns to target shareholders, we find that hedge fund activism significantly reduces existing bondholders’ wealth. Bondholders earn an average excess bond return of -3.9% around the initial 13D filing date, and an additional average excess bond return of -6.4% over the remaining year after the filing date. When examining the reasons behind these results, we find that negative excess bond returns are related to a subsequent decline in cash on hand (loss of collateral effects) and an increase in total debt as a percentage of total assets. In addition, negative bond returns are more prominent when the hedge fund activist conducts a confrontational campaign against the target firm or if the activist gains at least one seat on the target’s board within a year of the initial 13D filing. We also find evidence of an expropriation of wealth from the bondholder to the shareholder. We conclude that the intervention of the activist results in the firm taking actions that are deleterious to bondholder wealth.

Keywords: hedge fund, bond, expropriation of wealth

JEL Classification: G3

Suggested Citation

Klein, April and Zur, Emanuel, The Impact of Hedge Fund Activism on the Target Firm’s Existing Bondholders (November 21, 2009). Available at SSRN: https://ssrn.com/abstract=1526527 or http://dx.doi.org/10.2139/ssrn.1526527

April Klein

New York University (NYU) - Department of Accounting ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012
United States

Emanuel Zur (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
253
Abstract Views
1,937
Rank
219,894
PlumX Metrics