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Where Do Shareholder Gains in Hedge Fund Activism Come From? Evidence From Employee Pension Plans

Published online by Cambridge University Press:  05 January 2022

Anup Agrawal Open the ORCID record for Anup Agrawal [Opens in a new window]  and
Yuree Lim Open the ORCID record for Yuree Lim [Opens in a new window]
Anup Agrawal*
Affiliation:
University of Alabama Culverhouse College of Business
Yuree Lim
Affiliation:
University of Wisconsin-La Crosse College of Business Administration [email protected]
*
[email protected] (corresponding author)
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Abstract

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We find that defined benefit employee pension plans of firms that are targets of hedge fund activism experience underfunding and their defined contribution plans experience reductions in employer contributions. Pension underfunding occurs due to reduced employer contributions to the plans, which target firms justify by increasing the assumed rates of returns on plan investments and the discount rate used to compute the present value of plan obligations. Despite tilting plan investments toward riskier assets, pension fund performance does not improve after activists target a firm. Our evidence suggests that shareholder wealth gains from activism are partly wealth transfers from employees.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 6 , September 2022 , pp. 2140 - 2176
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Ilona Babenko, Jonathan Berk, Philip Bond, Ben Branch, David Cicero, Doug Cook, Simon Gervais, Jack He, Joon Ho Kim, Andrew Koch, Nhan Le, Tao Li, Greg Niehaus, Sugata Ray, Brian Song, and participants at the CFEA-Tulane, CICF-Tianjin, NFA-Halifax, Stanford SITE Workshop on Labor and Finance, and WFA meetings for useful comments. Special thanks are due to an anonymous referee, Alon Brav, Nick Gantchev, Jarrad Harford (the editor), and Joshua Rauh for detailed comments and helpful suggestions. Previous drafts of the article were called “The Dark Side of Hedge Fund Activism: Evidence From Employee Pension Plans.” Agrawal acknowledges financial support from the William A. Powell, Jr. Chair in Finance and Banking.

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