Wealth Effects of Hedge Fund Activism
60 Pages Posted: 16 Jun 2007 Last revised: 3 Aug 2018
Date Written: June 12, 2007
Do hedge funds add value to the companies they target or reap short-term benefits at the expense of others? This paper looks at the impact of shareholder activism on bondholders' wealth through the prism of bondholder-shareholder-manager conflicts as opposed to that of the activism literature, which exclusively focuses on the bilateral shareholder-manager conflicts. We use a comprehensive hand-collected database of activist SEC filings between January 1996 and March 2008. We run a battery of univariate and cross-sectional tests for the full sample and for different groups segmented by default risk, hedge fund activity, level and type of covenant protection, debt seniority and outcome of the activity. In the short-run, although we find some evidence that hedge funds transfer wealth from bondholders in the subsample of "investment-grade" bonds and "capital structure-related" activism, the expropriation is pronounced mostly for the "weakly protected" bonds and activism targeting shorter-term "strategic types of corporate changes". For the full sample and other subgroups we do not find that expropriation of wealth is a major source of stockholder gains. We show that the initial positive bond reaction is offset over extended time frames and that target bonds underperform their benchmarks starting one year after activist filing significantly by 3 percent to 5 percent per year for the full sample. Consistent with this finding, our results reveal that there is a greater incidence of downgrades than upgrades in the same time frame as return underperformance.
Keywords: going public, going private, financial constraints, agency costs, private equity deals
JEL Classification: G32, D23
Suggested Citation: Suggested Citation