The Credit and Bond Liquidity Effects of Hedge Fund Activism

Abstract

I document an abnormal increase in the price of default insurance for target firms at the time of an activist hedge fund intervention, despite an abnormal decrease in expected default losses. After the intervention, credit spreads remain abnormally high for confrontational activist campaigns but revert to or fall below their benchmarks for non-confrontational campaigns. Existing buy-and-hold creditors of the target firm therefore experience an abnormal long-term reduction of wealth only when the activist campaign is confrontational. Creditors who cancel out their position one year after a confrontational intervention incur additional losses beyond those due to increases in credit spreads, consistent with an abnormal reduction in bond liquidity.