Why Do US Firms Use More Long-Term Debt Post Activist Interventions?

Abstract

We find that US firms increase the use of long-term debt post hedge fund activism. The target firms' median proportion of debt maturing in more than 3 years increases by 19% in three years around the activists’ interventions. Firms with a lower level of leverage, research and development expenditure and cash holdings are the ones witnessing an increase in debt maturity profile. Our results indicate that this debt maturity change may not be influenced by bankers’ reluctance to provide capital (supply-side constraints) but due to targets’ increasing reliance on long-term public debt (demand-side factors). Hedge fund activism increases the propensity to raise long-term public debt in target firms. This indicates that new long-term debtholders believe in ‘shared benefits’ hypothesis by extending longer-term debt to target firms. The overall increase in debt maturity is more pronounced in target firms associated with governance reforms. Collectively, our findings suggest possible governance substitution from short-term debtholders to activist hedge funds.

Keywords: Debt maturity structure, Hedge fund activism, 13D filings

JEL Classification: G30, G32