TY - JOUR
T1 - Caught in the crossfire
T2 - How the threat of hedge fund activism affects creditors
AU - Feng, Felix Zhiyu
AU - Xu, Qiping
AU - Zhu, Caroline H.
N1 - Funding Information:
☆ We thank Kewei Hou (the editor), an anonymous associate editor, and two anonymous referees for their valuable suggestions. We are grateful to Alon Brav and Dou Lou for sharing the data on HFA and FIPP, respectively, and to Renée Adams, Alon Brav, Martijn Cremers, Nickolay Gantchev, Pengjie Gao, Oleg Gredil, Pab Jotikasthira, Elisabeth Kempf, Felix Meschke, Tom Nohel, Wei Wang, Ying Wang and Yeqin Zeng and seminar or conference participants at Duke University, Loyola University Chicago, University of Kansas, University of Notre Dame, the 2016 NFA annual meetings, the 2016 Southwestern Financial Symposium, the 2017 Manchester University Role of Hedge Fund conference and the 2017 University at Albany Financial Market Symposium for helpful comments.
Publisher Copyright:
© 2021 Elsevier B.V.
PY - 2021/12
Y1 - 2021/12
N2 - Firms under the threat of hedge fund activism on average experience significant losses of outstanding bondholder wealth: their bond yields rise while prices fall and ratings deteriorate. Under-threat firms receive inferior terms when initiating new loans. These observations are more prominent in firms with weaker creditor rights protection and firms that experience more significant improvement in stock performance without accompanying real improvements. These findings are consistent with the manifestation of agency problems. Share repurchases funded by cash, investment cutbacks, and new debt issuances elevate share price, which increases the cost of intervention for activists but jeopardizes the interest of existing bondholders.
AB - Firms under the threat of hedge fund activism on average experience significant losses of outstanding bondholder wealth: their bond yields rise while prices fall and ratings deteriorate. Under-threat firms receive inferior terms when initiating new loans. These observations are more prominent in firms with weaker creditor rights protection and firms that experience more significant improvement in stock performance without accompanying real improvements. These findings are consistent with the manifestation of agency problems. Share repurchases funded by cash, investment cutbacks, and new debt issuances elevate share price, which increases the cost of intervention for activists but jeopardizes the interest of existing bondholders.
KW - Corporate governance
KW - Credit market outcomes
KW - Hedge fund activism
KW - Shareholder- bondholder conflict
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U2 - 10.1016/j.jempfin.2021.08.008
DO - 10.1016/j.jempfin.2021.08.008
M3 - Article
AN - SCOPUS:85114811391
VL - 64
SP - 128
EP - 143
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
SN - 0927-5398
ER -