Targeted by an Activist Hedge Fund, Do the Lenders Care?

56 Pages Posted: 16 Oct 2018 Last revised: 7 Nov 2018

See all articles by Sandeep Dahiya

Sandeep Dahiya

Georgetown University - Department of Finance

Issam Hallak

European Commission Joint Research Center; KU Leuven - Faculty of Business and Economics (FEB)

Thomas Matthys

Ghent University-Universiteit Gent - Department of Financial Economics

Date Written: September 29, 2018

Abstract

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

Dahiya, Sandeep and Hallak, Issam and Matthys, Thomas, Targeted by an Activist Hedge Fund, Do the Lenders Care? (September 29, 2018). Georgetown McDonough School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3252180 or http://dx.doi.org/10.2139/ssrn.3252180

Sandeep Dahiya (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3832 (Phone)

Issam Hallak

European Commission Joint Research Center ( email )

1049
Belgium

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Thomas Matthys

Ghent University-Universiteit Gent - Department of Financial Economics ( email )

Ghent, 9000
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
36
Abstract Views
280
PlumX Metrics