Hedge Fund Activism in the Corporate Bond Market: Evidence from Bondholders’ Responses to Delay in Financial Reporting

2019-06-28

SpeakerYu GaoAssistant professor from University of St. Thomas

Time: 14:00pm, Tuesday, July 2,2019

SiteEMS A208

Abstract: We investigate hedge fund activism in the corporate bond market. The empirical setting we use is the active enforcement of bondholders’ rights during 2003-07 triggered by issuers’ violation of a standard bond covenant requiring timely financial reporting. Specifically, we examine differences in target company characteristics, strategic trading behavior, and subsequent outcomes between hedge-fund involved and non-hedge-fund-involved interventions. We find that hedge-fund-involved interventions are more likely to target companies with higher levels of cash holdings, but less likely to target companies with a higher bankruptcy probability and greater amount of private debt outstanding. Meanwhile, the late filers in hedge-fund-involved interventions are more likely to have liquid bonds and their later filings are more likely to be predicted (e.g., triggered by option backdating investigations). The empirical evidence from strategic trading and market reactions suggests that hedge-fund-involved interventions are associated with elevated bond trading frequency before late filing notifications and a wealth transfer from stockholders and non-intervening bondholders to intervening bondholders. However, these results are not present for non-hedge-fund-involved interventions. Taken together, the empirical evidence suggests that hedge fund activism in the corporate bond market is primarily driven by short-term profit consideration.

Introduction to the Speaker

Yu Gao received her PhD in accounting and her MBA from the University of Chicago Booth School of Business. Before she joined the University of St. Thomas Opus College of Business, she was a faculty member at the University of Minnesota Carlson School of Management. She teaches courses in financial accounting to undergraduate and graduate students.