The Dark Side of Hedge Fund Activism: Evidence from Employee Pension Plans

Abstract

We find that defined benefit employee pension plans of target firms experience greater underfunding after hedge fund activism. Targets reduce employer contributions, which they justify by increasing the assumed rates of return on plan investments. Despite tilting plan investment toward riskier assets, performance suffers. Moreover, the stock price reaction to activism announcement predicts future increases in pension underfunding. Our identification strategy uses a difference-in-differences method using matched non-targets, firm fixed effects, and tests of underlying mechanisms and alternative hypotheses. Shareholder gains from activism appear to partly come from raiding deferred compensation promised to workers, and from taxpayers via PBGC guarantees.

Keywords: Hedge fund activism, Corporate pensions, Defined benefit pension plans

JEL Classification: G34, G23, G30