The Role of Activist Hedge Funds in Financially Distressed Firms
31 Pages Posted: 28 Jun 2013 Last revised: 25 Feb 2016
Date Written: September 6, 2013
This paper investigates the role of activist hedge funds in the restructuring of a sample of 469 firms that attempted to resolve distress either out of court, in conventional Chapter 11, or via prepackaged restructuring. Activist hedge funds strategically gain a position of influence in the restructuring of economically viable firms with contracting problems that prevent efficient restructuring without outside intervention. I find that hedge fund involvement is associated with a higher probability of completing prepackaged restructurings, faster restructurings, and greater debt reduction. Overall, the evidence in this paper suggests that activist hedge funds can create value by enabling more efficient contracting.
Keywords: Hedge funds, Activism, Restructuring, Contracting problems
JEL Classification: G33, G34, G23
Suggested Citation: Suggested Citation