Targeted by an Activist Hedge Fund, Do the Lenders Care?
56 Pages Posted: 16 Oct 2018 Last revised: 7 Nov 2018
Date Written: September 29, 2018
Do banks worry about expropriation when an activist hedge fund targets their borrowers or are they reassured that their borrowers will perform better after such targeting? We study 1,435 events during the 1996-2013 period in which an activist targeted a US corporation to examine what happens to loan contract terms post-targeting. We present two new results. First, we show that when a firm is targeted by an activist hedge fund, the lenders of that firm charge a significantly higher rate on future loans and demand collateral more frequently when compared to risk- and industry-matched loans made to non-targeted firms. Second, we find that this increase in loan rate and the likelihood of collateral demand is limited to only targets that experience a large positive announcement return when the news of an activist’s involvement is first announced. We argue that this increase reflects the higher credit risk for these borrowers partly due to a possibility of wealth expropriation by the shareholders. Thus, we provide empirical evidence that an increase in equity value due to activist’s targeting may partially be due to wealth expropriation from creditors.
Keywords: Hedge Fund Activism, Corporate Governance, Bank Lending
JEL Classification: G21, G23, G32, G34
Suggested Citation: Suggested Citation