Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital

55 Pages Posted: 23 Jun 2016 Last revised: 20 Jan 2018

See all articles by Sean J. Griffith

Sean J. Griffith

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Natalia Reisel

Fordham University

Date Written: January 19, 2018

Abstract

We investigate the Dead Hand Proxy Put, a contractual innovation in corporate debt agreements that may impact hedge fund activism. We find the provision principally in loans, not bonds, and provide evidence linking adoption of the provision to hedge fund activism. Further, controlling for endogeneity, we find that the provision significantly reduces the cost of loans. Bondholder wealth also increases. Moreover, cross-sectional analysis of share returns reveals that the provision is positively associated with repeat banking relationships and negatively associated with free cash flow problems, suggesting a cost-benefit tradeoff.

Keywords: debt contract design, shareholder-debtholder conflict, agency cost of debt, hedge fund activism, defensive provisions, proxy fights

JEL Classification: G2, G3, G21, G32, G34, K22

Suggested Citation

Griffith, Sean J. and Reisel, Natalia, Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital (January 19, 2018). Available at SSRN: https://ssrn.com/abstract=2799491 or http://dx.doi.org/10.2139/ssrn.2799491

Sean J. Griffith (Contact Author)

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Natalia Reisel

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

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