Shareholder Activism and Bond Price Returns

Abstract: Hedge fund activism is an increasingly occurring event in the financial markets, often resulting in positive returns for shareholders. This study examines how bondholders are affected in terms of bond price returns. Particularly, differences between reactions in economic downturns and booms are in focus. Looking at a sample of U.S.-based companies targeted by activists between 2005 and 2012, we find that activism interventions result in declining bond prices on average. Although this conclusion applies to the sample as a whole, dividing the sample into two groups, before and after the Lehman Brothers bankruptcy in 2008, reveals that the negative average returns observed in previous literature are likely to be strongly biased by results coming from weak economic time periods. As a matter of fact, a general direction of the price movements following a hedge fund activist entrance and 13D filing is difficult to predict in more stable macroeconomic phases. After a financial crisis the evidence of declining returns is much more noteworthy.