Two Essays on Shareholder Activism

Abstract

The dissertation consists of two essays on shareholder activism. In the first essay, I study the effect of hedge fund activism on total firm value and on wealth transfers between financial claimants, as well as the channels for these effects. Overall, activist hedge funds increase total firm value by 3.59%. Though I detect some degree of wealth transfer from bondholders to shareholders, the magnitude is tiny: among firms with public bonds outstanding, for every $1 million increase in shareholder wealth due to activism, the decrease in bondholder wealth is a mere $15,000, and it is even smaller for other firms. Both value creation and wealth transfer effects are driven by shifting the capital structure toward short-term debt, as well as shifting real investment toward intangible assets. I fail to find evidence that CEO inside debt holdings mitigate these effects. Finally, I find that institutions holding both stock and bonds in firms before an activist hedge fund campaign tend to divest their bond holdings rather than resist the campaign.

In the second essay, along with my co-author, I contribute to the literature on the role of lending institutions in shareholder activism by examining the security lending market. Security lenders re-call (restrict) loaned shares (lendable supply) around the time of a shareholder activism announcement. Significant recall activity is observed in control change-related campaigns where activists seek to acquire the target or block a merger. Activists are more likely to achieve their goals in these campaigns and recalling facilitates the sale of target firms. Furthermore, recalling is associated with higher announcement date cumulative abnormal returns (CARs) and higher long-term abnormal returns, even for target firms that remain independent after activist interventions. Overall findings suggest that security lending institutions recall lendable supply either to cooperate with activists or to monitor the target firms.