Do Activist Investors Constrain Managerial Moral Hazard in Chapter 11?: Evidence from Junior Activist Investing
72 Pages Posted: 14 Aug 2013 Last revised: 29 Sep 2018
Date Written: August 2, 2015
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: Suggested Citation