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

49 Pages Posted: 14 Jul 2017 Last revised: 31 Jul 2018

See all articles by Anup Agrawal

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration

Yuree Lim

University of Wisconsin - La Crosse - College of Business Administration

Date Written: September 29, 2017

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

Suggested Citation

Agrawal, Anup and Lim, Yuree, The Dark Side of Hedge Fund Activism: Evidence from Employee Pension Plans (September 29, 2017). 29th Annual Conference on Financial Economics & Accounting 2018. Available at SSRN: https://ssrn.com/abstract=3000596 or http://dx.doi.org/10.2139/ssrn.3000596

Anup Agrawal (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
EFLS, Box 870224
Tuscaloosa, AL 35487-0224
United States
205-348-8970 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://aagrawal.people.ua.edu/

Yuree Lim

University of Wisconsin - La Crosse - College of Business Administration ( email )

1725 State St
La Crosse, WI 54601
United States

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