... we find that employees of target firms that sponsor DB pension plans suffer from greater plan underfunding after HF activism. This finding is consistent with the view that HF activists expropriate wealth from employees. Underfunding implies that a plan’s liabilities exceed its assets, potentially hurting employees after they retire. We then examine the mechanisms that lead to the underfunding of pension plans. We find that targeted firms reduce employer contributions by increasing the assumed rates of returns on plan investments and the discount rate used to compute the present value of plan obligations. Firms also tilt plan investments toward riskier assets, in a failed effort to boost plan returns. Activists typically exit the firm after 1.5 to 2 years (see Brav, Jiang and Kim (2009)), but the effect on employee pensions is long-term and persists over at least the next five years. While most of our paper deals with defined benefit pension plans, about which there are more data, we also find that target firms reduce employer contributions in defined contribution plans.
There are two potential interpretations of our findings. First, HF activists put pressure on managers to increase shareholder wealth, and managers respond by raiding employee pension funds. Second, observable and unobservable characteristics of these firms that lead activist HFs to target them also lead the firms to underfund employee pensions. We provide three types of evidence that favors the first interpretation over the second.
Maybe Elizabeth Warren should lay off corporations and focus on hedge fund activists.
