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Do Activist Investors Constrain Managerial Moral Hazard in Chapter 11?: Evidence from Junior Activist Investing

72 Pages Posted: 14 Aug 2013 Last revised: 3 Aug 2015

Jared A. Ellias

University of California, Hastings

Date Written: August 2, 2015

Abstract

This paper examines the hedge fund investment strategy of buying junior claims of Chapter 11 debtors and playing an activist role in the bankruptcy process. These hedge funds are often accused of rent-seeking by managers. I use a new methodology to conduct the first empirical study of this investment strategy. I find little evidence that junior activists abuse the bankruptcy process to extract hold-up value. Instead, the results suggest that they constrain managerial self-dealing and promote the bankruptcy policy goals of maximizing creditor recoveries and distributing the firm’s value in accordance with the absolute priority rule.

Keywords: Chapter 11, activist investors, distressed debt

JEL Classification: G23, G30, G33

Suggested Citation

Ellias, Jared A., Do Activist Investors Constrain Managerial Moral Hazard in Chapter 11?: Evidence from Junior Activist Investing (August 2, 2015). The Journal of Legal Analysis, Forthcoming; Rock Center for Corporate Governance at Stanford University Working Paper No. 155; Stanford Law and Economics Olin Working Paper No. 451. Available at SSRN: https://ssrn.com/abstract=2308994 or http://dx.doi.org/10.2139/ssrn.2308994

Jared A. Ellias (Contact Author)

University of California, Hastings ( email )

200 McAllister Street
San Francisco, CA 94102
United States

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