Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions

Review of Financial Studies (2014) 27(11): 3318-3342

42 Pages Posted: 11 Jan 2011 Last revised: 22 Apr 2015

See all articles by Jayanthi Sunder

Jayanthi Sunder

University of Arizona - Eller College of Management

Shyam V. Sunder

University of Arizona - Department of Accounting

Wan Wongsunwai

The Chinese University of Hong Kong (CUHK)

Date Written: July 1, 2014

Abstract

We investigate the effect of shareholder activism on debtholders by examining a sample of bank loans for firms targeted by activist hedge funds. We compare loan spreads before and after intervention and show the effects of heterogeneous shareholder actions. Spreads increase when shareholder activism relies on the market for corporate control or financial restructuring. In contrast, spreads decrease when activists address managerial entrenchment. Furthermore, the effects are more pronounced when pre-existing governance mechanisms are weak. Our findings suggest that shareholder activism does not necessarily exacerbate bondholder-shareholder conflicts of interest and highlight the role of activism in aligning investors.

Keywords: Shareholder activism, hedge funds, debtholders

JEL Classification: G14, G32, G34

Suggested Citation

Sunder, Jayanthi and Sunder, Shyam and Wongsunwai, Wan, Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions (July 1, 2014). Review of Financial Studies (2014) 27(11): 3318-3342. Available at SSRN: https://ssrn.com/abstract=1737962 or http://dx.doi.org/10.2139/ssrn.1737962

Jayanthi Sunder

University of Arizona - Eller College of Management ( email )

School of Accountancy
1130 E Helen St.
Tucson, AZ 85721
United States
520-626-8489 (Phone)

Shyam Sunder

University of Arizona - Department of Accounting ( email )

210 L McClelland Hall
1130 E Helen St
Tucson, AZ 85721
United States

Wan Wongsunwai (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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