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Dead Hand Proxy Puts and Hedge Fund Activism

Published online by Cambridge University Press:  25 October 2018

Sean J. Griffith  and
Natalia Reisel
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Abstract

We investigate the Dead Hand Proxy Put, a contractual innovation in corporate debt agreements that may impact hedge fund activism. We find the provision principally in loans, not bonds, and provide evidence linking the adoption of the provision to hedge fund activism. Furthermore, controlling for endogeneity, we find that the provision significantly reduces the cost of loans. Bondholder wealth also increases. Moreover, cross-sectional analysis of share returns reveals that the provision is positively associated with repeat banking relationships and negatively associated with free cash flow problems, suggesting a cost-benefit tradeoff.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 4 , August 2019 , pp. 1615 - 1642
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We have benefited from discussions with Yakov Amihud, Jennifer Arlen, Alon Brav, Joe Grundfest, Victoria Ivashina, Frank Partnoy, Eric Talley, John Wald, and Mark Weinstein and from comments received at the 2016 American Law and Economics Association conference, the 2016 Conference on Empirical Legal Studies and presentations at Florida State University, Fordham University, the University of California Los Angeles, the University of Notre Dame, the University of Southern California, and at Young Conaway Stargatt & Taylor. An earlier version of this paper was circulated under the title “Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital.” We also thank Paul Malatesta (the editor) and an anonymous referee for their constructive guidance that greatly improved the paper.

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