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 buyout premium is increasing in the preannouncement presence of hedge funds, measured as the fraction of equity held by hedge funds in the target firm before the announcement. This effect is driven primarily by hedge funds with activism agendas. This effect is stronger for LBOs with management participation than for third-party LBOs, and is stronger for club deal LBOs than for solo-sponsored LBOs. Using a geographic instrument for the presence of hedge fund, I find that this relationship persists even after controlling for endogeneity. These findings indicate that hedge funds protect target shareholder interests in LBOs.

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

JEL Classification: G23, G34, G14