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Activist funds, leverage, and procyclicality

Burkart, Mike and Dasgupta, Amil (2015) Activist funds, leverage, and procyclicality. SRC Discussion Paper (No 40). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

We develop a dual-layered agency model to study blockholder monitoring by activist funds that compete for investor flow. Competition for flow affects the manner in which activist hedge funds govern as blockholders. In particular, funds inflate short-term performance by increasing payouts financed by (net) leverage, which discourages value-creating interventions in economic downturns due to debt overhang. Our theory links together the observed procyclicality of activist block formation with the documented effect of such funds on the leverage of their target companies. The model also generates new testable implications and reconciles seemingly contradictory empirical evidence regarding hedge fund activism.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Finance
Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Research centres and groups > Systemic Risk Centre
Date Deposited: 21 Jan 2016 12:58
Last Modified: 12 Dec 2017 08:06
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/65095

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