Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions Jayanthi Sunder Eller School of Management, University of Arizona Phone: (520) 621-8489 Email:
[email protected] Shyam V. Sunder Eller School of Management, University of Arizona Phone: (520) 621-4830 Email:
[email protected] Wan Wongsunwai Kellogg School of Management, Northwestern University Phone: (847) 491-2658 Email:
[email protected] September 2011 We thank the Accounting Research Center and the Revsine Research Fellowship at the Kellogg School of Management for funding this research. We also thank participants at the Information, Markets, and Organizations Conference at Harvard Business School and FARS Conference 2011, and workshop participants at the University of Illinois at Chicago for helpful comments and suggestions. Gary Chen provided excellent research assistance. All errors remain ours. Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions Abstract We investigate the effect of shareholder activism on debtholders. We examine a sample of private loans taken out by firms targeted by hedge fund shareholder activists between 1995 and 2008. We find that lenders’ reaction to hedge fund intervention is conditional on the nature of the shareholder activism. We compare spreads in loan contracts of target firms before and after intervention by activist hedge funds. While lenders charge higher spreads when the activist’s objective is to force the target into being acquired or to increase payouts to shareholders, they charge 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.