Showing papers by "Wei Jiang published in 2016"

Influencing Control: Jawboning in Risk Arbitrage

Abstract: In an "activist risk arbitrage," a shareholder attempts to change the course of an announced M&A deal through public campaigns, and profits from improved terms. Compared to conventional (passive) risk arbitrageurs, activists target deals susceptible to managerial conflicts of interest (e.g., going-private and "friendly" deals) and deals with lower announcement premiums. Their presence increases the sensitivity of deal completion to market signals. While they block a significant proportion of planned deals, activist arbitrageurs only modestly decrease the probability that the targets will eventually be acquired (including by a third party). Finally, the strategy yields significantly higher returns than passive arbitrage.

How Does Hedge Fund Activism Reshape Corporate Innovation

Abstract: This paper studies how hedge fund activism reshapes corporate innovation. Firms targeted by hedge fund activists experience an improvement in innovation efficiency during the five-year period following the intervention. Despite a tightening in R&D expenditures, target firms experience increases in innovation output, measured by both patent counts and citations, with stronger effects seen among firms with more diversified innovation portfolios. We also find that the reallocation of innovative resources and the redeployment of human capital contribute to the refocusing of the scope of innovation. Finally, additional tests refute alternative explanations attributing the improvement to mean reversion, sample attrition, management’s voluntary reforms, or activists’ stock-picking abilities.

Out-of-the-Money CEOs: Private Control Premium and Option Exercises

Abstract: When a proxy contest is looming, the rate at which CEOs exercise options to sell (hold) the resulting shares slows down by 80% (accelerates by 60%), consistent with their desire to maintain or strengthen voting rights when facing challenges. Such deviations are closely aligned with features unique to proxy contests, such as the record dates and nomination status, and are more pronounced when the private benefits are higher or when the voting rights are more crucial. The distortions suggest that incumbents value their stocks higher than the market price when voting rights are valuable for defending control.

Mutual Fund Holdings of Credit Default Swaps: Liquidity, Yield, and Risk Taking

Abstract: Using mutual funds quarterly holdings of credit default swap (CDS) contracts from pre- to post-financial crisis, we analyze the motives for and consequences of funds' CDS investment. Funds resort to CDS selling when facing unpredictable liquidity needs and when the CDS security is liquid relative to the underlying bond, and to CDS buying as part of a "negative basis trade" when the bond is illiquid. Funds CDS strategies tilt toward yield enhancement, and smaller funds follow leading funds in risk taking. The reference entities that attracted the highest selling interest from the large funds were disproportionately large financial institutions.

Appraisal: Shareholder Remedy or Litigation Arbitrage?

Abstract: This study provides the first large-sample empirical analysis on the characteristics, determinants, and returns from appraisal petitions during 2000-2014. We find that appraisal petitions increase from 2-3% of the eligible M&A deals in the early 2000s to around 25% of such deals in the most recent years. Appraisal petitions, particularly in the post-2007 era, appear focused on mergers with potential conflicts of interest, such as, going private deals, minority squeezeouts, as well as targeting transactions with low deal premiums. This illustrates the importance of appraisal as a corporate governance remedy. Appraisal petitions generate non-negative gross returns for petitioners throughout the sample period, with an average (median) annualized return of 32.9% (19.3%), suggesting that appraisal litigation has been a profitable arbitrage strategy especially for specialized and frequent players, mostly hedge funds. This study also assesses the effect of two recent changes to the Delaware appraisal statute. First, Delaware restricted appraisal to petitioners with a stake above $1 million or 1% of outstanding shares. This could cut the amount of appraisal litigation by about one-quarter, but is unlikely to distort the underlying economic reasons why shareholders seek appraisal. Second, appraisal petition filings are highly sensitive to prejudgment interest yield post-2007, with the prevailing 5% statutory rate above the risk-free rate in the current low interest era associated with a 45% increase in the appraisal petitions. This result confirms anecdotal evidence that appraisals have, to some extent, become back-door interest rate arbitrage, and supports Delaware’s statutory changes that should mitigate this problem.

Mutual Fund Holdings of Credit Default Swaps: Liquidity Management and Risk Taking

Abstract: Using a comprehensive dataset of mutual funds’ quarterly holdings of credit default swap (CDS) contracts during 2007-2011, we analyze the motives for and consequences of mutual funds’ participation in the CDS market pre- and post-financial crisis Consistent with theoretical work, funds resort to CDS (especially selling) when they face unpredictable liquidity needs and when the CDS securities are liquid, relative to the underlying bonds Funds also take advantage of the negative basis between CDS and bond yields, especially for the relatively illiquid bonds Smaller funds follow leading funds in initiating CDS contracts on new reference entities Moreover, the reference entities that attracted the highest-selling interests from the largest mutual funds are disproportionately firms that were perceived to be “too large to fail” or “too systemic to fail”

Appraisal: Shareholder Remedy or Litigation Arbitrage?

Abstract: We present the first large-sample empirical study of the recent trends in the appraisal remedy—the right of shareholders of companies completing an eligible merger to petition the court for an improved price for their shares. Appraisal petitions have increased markedly over our sample from 2000 to 2014, and the composition of those bringing these suits has shifted from individual shareholders toward specialized hedge funds. Appraisal petitions are more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism. Appraisals yield sizable excess returns to the petitioners, with an average annualized return of 32.9 percent, which suggests that appraisals also act as a litigation arbitrage. Finally, we explore the likely effects of two recent changes to the Delaware appraisal statute—regarding the minimum stake and interest payment—on the ...

Reforming the Delaware Appraisal Statute to Address Appraisal Arbitrage: Will It Be Successful?

Abstract: Delaware is considering significant changes to its appraisal statute to address problems created by the recent wave of appraisal arbitrage. This study provides a large-sample empirical analysis of those proposals to see what effects they will have on appraisal litigation. Looking first at the overall appraisal landscape, we find that recent appraisal petitions seem to be motivated by the appearance of transactions with potential conflicts of interest, such as going private deals, minority squeezeouts, and those with low deal premiums. The proposed De Minimis Exception which restricts appraisal to petitioners with a stake above $1 million or 1% of outstanding shares could cut down the amount of appraisal litigation by over one-third, but is unlikely to distort the underlying economic reasons why shareholders seek appraisal. The proposed Interest Reduction Amendment, which lowers the well above-the-market statutory interest rate for appraisal awards, is also likely to greatly reduce appraisal filings as it appears to have been the driving force for almost 45% of the petitions filed in recent years, especially the ones with high stakes.