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The Role of Activist Hedge Funds in Financially Distressed Firms

Published online by Cambridge University Press:  26 January 2016

Jongha Lim
Jongha Lim*
Affiliation:
jolim@fullerton.edu, Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92834.
*
*Corresponding author: jolim@fullerton.edu
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Abstract

In this paper I investigate the role of activist hedge funds in the restructuring of a sample of 469 firms that attempted to resolve distress either out of court, in conventional Chapter 11, or via prepackaged restructuring. Activist hedge funds strategically gain a position of influence in the restructuring of economically viable firms with contracting problems that prevent efficient restructuring without outside intervention. I find that hedge fund involvement is associated with a higher probability of completing prepackaged restructurings, faster restructurings, and greater debt reduction. Overall, the evidence in this article suggests that activist hedge funds can create value by enabling more efficient contracting.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 6 , December 2015 , pp. 1321 - 1351
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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