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Activist funds, leverage, and procyclicality

Burkart, Mike ORCID: 0000-0002-0954-4499 and Dasgupta, Amil ORCID: 0000-0001-8474-9470 (2015) Activist funds, leverage, and procyclicality. Systemic Risk Centre Discussion Papers (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
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
Date Deposited: 21 Jan 2016 12:58
Last Modified: 15 Sep 2023 23:37
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/65095

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