The Role of Activist Hedge Funds in Financially Distressed Firms

31 Pages Posted: 28 Jun 2013 Last revised: 25 Feb 2016

See all articles by Jongha Lim

Jongha Lim

California State University, Fullerton - Department of Finance

Date Written: September 6, 2013

Abstract

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

Lim, Jongha, The Role of Activist Hedge Funds in Financially Distressed Firms (September 6, 2013). Journal of Financial and Quantitative Analysis (JFQA), Vol. 50, No. 6, 2015, Available at SSRN: https://ssrn.com/abstract=2285884 or http://dx.doi.org/10.2139/ssrn.2285884

Jongha Lim (Contact Author)

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

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