The effect of shareholder activism on bondholders and stockholders

Abstract

Abstract We examine the wealth effect of shareholder activism on bond returns, as well as the extent to which wealth is transferred from bondholders to shareholders, which we refer to as the wealth-transfer effect. Our activist dataset includes both hedge funds and other large shareholders. Our bond dataset covers both investment-grade and speculative-grade bonds, and extends beyond the 2007–2009 financial crisis period. We find that activists’ demands cause a significant decline in bond returns, and affect long-term bonds the most. There exists a strong association between the bond price declines and dividend increases following the activists’ demands, with dividends acting as a proxy for the transfer of wealth from bondholders to shareholders. The wealth transfer affects long-term and lower rated bonds more significantly. With stock returns to targeted firms positive, our findings suggest an inverse association between bond returns and stock returns at firms targeted by activists.