Download this Paper Open PDF in Browser

Caught in the Crossfire: How the Threat of Hedge Fund Activism Affects Creditors

55 Pages Posted: 18 Jan 2016 Last revised: 14 Jan 2017

Felix Zhiyu Feng

University of Notre Dame

Qiping Xu

University of Notre Dame - Department of Finance

Heqing Zhu

University of Oklahoma

Date Written: January 12, 2017

Abstract

This paper examines how the threat of hedge fund activism (HFA) affects creditors. Using difference-in-difference and instrumental variable approaches, we find that in threatened industries, firms with an ex ante high likelihood of HFA experience significant losses to bondholder wealth. Specifically, bond yield and default probability increase, credit ratings deteriorate and, in loan initiations, spreads and the number of restrictive covenants increase. At the same time, these firms repurchase shares, decrease cash and issue new debt, which tend to enhance share value but jeopardize creditor interests. Our paper contributes to a more complete understanding of the impact of HFA.

Keywords: Hedge fund activism, corporate governance, shareholder-bondholder conflict

JEL Classification: G34, G23, G32, G12

Suggested Citation

Feng, Felix Zhiyu and Xu, Qiping and Zhu, Heqing, Caught in the Crossfire: How the Threat of Hedge Fund Activism Affects Creditors (January 12, 2017). Available at SSRN: https://ssrn.com/abstract=2716929 or http://dx.doi.org/10.2139/ssrn.2716929

Zhiyu Feng (Contact Author)

University of Notre Dame ( email )

3079 Jenkins-Nanovic
Notre Dame, IN 46556
United States
(574)631-0428 (Phone)

HOME PAGE: http://felixzhiyufeng.weebly.com/

Qiping Xu

University of Notre Dame - Department of Finance ( email )

Mendoza College of Business
Notre Dame, IN 46556-0399
United States

Heqing Zhu

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

Paper statistics

Downloads
230
Rank
112,618
Abstract Views
1,117