Caught in the Crossfire: How the Threat of Hedge Fund Activism Affects Creditors
55 Pages Posted: 18 Jan 2016 Last revised: 14 Jan 2017
Date Written: January 12, 2017
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: Suggested Citation