Does Hedge Fund Activism Influence Trade Credit?
52 Pages Posted: 25 Feb 2020
Date Written: December 15, 2019
I find that targets’ supplier firms reduce the extension of trade credit (accounts payable) by 28 per cent relative to control firms post hedge fund activism. This reduction is on account of supply-side factors indicating expropriation concerns of supplier firms. Firms, who were financially unconstrained during one year before activism, extend lower trade credit to their customers. Post interventions, there is decrease in operating cash flow as well as cash holdings, and increase in dividend payments, potentially accounting for this reduction in trade receivables by financially unconstrained target firms. Trade receivables attenuate by 12 per cent compared to control firms post activist interventions. Further, firms with higher level of leverage and lower level of tangible assets witness a reduction in both trade receivables and accounts payable. The study provides novel evidence that the repercussions of hedge fund activism extend beyond the formal debtholders, and informal debtholders such as trade creditors are not an exception.
Keywords: accounts payable; hedge fund activism; trade credit; trade receivables
JEL Classification: G30; G31; G34
Suggested Citation: Suggested Citation