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

48 Pages Posted: 18 Jan 2016 Last revised: 14 Sep 2021

See all articles by Felix Zhiyu Feng

Felix Zhiyu Feng

University of Washington - Michael G. Foster School of Business

Qiping Xu

University of Illinois Urbana Champaign

Caroline Zhu

University of Oklahoma

Date Written: August 31, 2021

Abstract

Firms under the threat of hedge fund activism on average experience significant losses of outstanding bondholder wealth: their bond yields rise while prices fall and ratings deteriorate. Under-threat firms receive inferior terms when initiating new loans. These observations are more prominent in firms with weaker creditor rights protection and firms that experience more significant improvement in stock performance without accompanying real improvements. These findings are consistent with the manifestation of agency problems. Share repurchases funded by cash, investment cutbacks, and new debt issuances elevate share price, which increases the cost of intervention for activists but jeopardizes the interest of existing bondholders.

Keywords: hedge fund activism, credit market outcomes, corporate governance, shareholder-bondholder conflict

JEL Classification: G34, G32, G23, G12

Suggested Citation

Feng, Felix and Xu, Qiping and Zhu, Caroline, Caught in the Crossfire: How the Threat of Hedge Fund Activism Affects Creditors (August 31, 2021). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2716929 or http://dx.doi.org/10.2139/ssrn.2716929

Felix Feng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Qiping Xu

University of Illinois Urbana Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Caroline Zhu

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

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