2014. Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions
We investigate the effect of shareholder activism on debtholders. We examine a sample of bank loans taken out by firms targeted by hedge fund shareholder activists between 1995 and 2008. We find that, after the arrival of hedge fund activists, banks charge higher spreads when the activist’s objective is to force the target into being acquired or to increase payouts to shareholders, and lower spreads when the activist’s objective is to block a takeover of the target or to oust an entrenched CEO. We also find that the proportion of general covenants to total covenants increases when the target is likely to be sold after entry of the activist shareholder. Overall, the results suggest that activist hedge fund intervention affects the risk faced by lending banks. However, unlike prior studies, we show that the effects vary with the nature of actions undertaken by the shareholder activist.
Wongsunwai, Wan, Jayanthi Sunder and Shyam V. Sunder. Forthcoming. 2014. Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions. Review of Financial Studies .