Question

1. Briefly describe the way in which creditors play a role in corporate governance. How does this role help to increase the value of the firm?

2. Does hedge fund activism help or hurt other shareholders in a firm? What about other stakeholders, such as creditors and company executives?

Answer 1

1)*Creditors can afford to provide financing to a wide range of clients at reasonable rates and play an important role in corporate governance.

*Creditors have an intrinsic preference for financial prudence and a comapny's ability to not only repay its credit obligations on a timely basis,but also to maintain a stable and predictable credit risk profile. It eventually increases the value of the firm.

2)*Most agency based study reveals that ownership by activist hedge funds enhances financial value.

*Hedge fund activism generally improves a targeted firm's value because activist convince managers to make decisions that build shareholders wealth and reduce wastefulspending in areas that create agency conflicts.

*It is also considered that the positive stock market reaction to activism might reflect wealth redistribution from creditors and company executives.