Chapter 18

The activist investment strategy involves efforts by shareholders to use their rights, such as voting power or the threat of such power, to influence corporate governance to their financial benefit as shareholders.

Agency costs are any costs, explicit (e.g., monitoring and auditing costs) or implicit (e.g., excessive corporate perks), resulting from inherent conflicts of interest between shareholders as principals and managers as agents.

Agency theory studies the relationship between principals and agents.

An agent compensation scheme is all agreements and procedures specifying payments to an agent for services, or any other treatment of an agent with regard to employment.

An antitrust review is a government analysis of whether a corporate merger or some other action is in violation of regulations through its potential to reduce competition.

The bankruptcy process is the series of actions taken from the filing for bankruptcy through its resolution.

A bidding contest or bidding war is when two or more firms compete to acquire the same target.

Capital structure arbitrage involves offsetting positions within a company's capital structure with the goal of being long relatively underpriced securities, being short overpriced securities, and being hedged against risk.

Corporate event risk is dispersion in economic outcomes due to uncertainty regarding corporate events.

Corporate governance describes the processes and people that control the decisions of a corporation.

Distressed debt hedge funds invest in the securities of a corporation that is in bankruptcy or is likely to fall into bankruptcy.

The event-driven category of hedge funds includes activist hedge funds, merger arbitrage funds, and distressed securities funds, as well as special situation funds and multistrategy funds that combine a variety of event-driven strategies.

Event-driven multistrategy funds diversify across a wide variety of event-driven strategies, participating in opportunities in both corporate debt and equity securities.

Financial market segmentation occurs when two or more markets use different valuations for similar assets due to the lack of participants who trade in both markets or who perform aritrage between the markets.

Financing risk is the economic dispersion caused by failure or potential failure of an entity, such as an acquiring firm, to secure the funding necessary to consummate a plan.

In the United States, Form 13D is required to be filed with the Securities and Exchange Commission (SEC) within 10 days, publicizing an activist's stake in a firm once the activist owns more than 5% of the firm and has a strategic plan for the firm.

In the United States. Form 13F is a required quarterly filing of all long positions by all U.S. asset managers with over $100 million in assets under management, including hedge funds and mutual funds, among other investors.

In the United States, Form 13G is required of passive shareholders who buy a 5% stake in a firm, but this filing may be delayed until 45 days after year-end.

A free rider is a person or entity that allows other to pay initial costs and then benefits from those expenditures.

Interlocking boards occur when board members from multiple firms - especially managers - simultaneously serve on each other's boards and may lead to a reduced responsiveness to the interests of shareholders.

In a liquidation process (chapter 7 in U.S. bankruptcy laws), all of the assets of the firm are sold, and the cash proceeds are distributed to creditors.

A long binary call option makes one payout when the referenced price exceeds the strike price at expiration and a lower payout or no payout in all other cases.

A long binary put option makes one payout when the referenced price is lower than the strike price at expiration and a lower payout or no payout in all other cases.

Merger arbitrage attempts to benefit from merger activity with minimal risk and is perhaps the best-known event-driven strategy.

A one-off transaction has one or more uniqui characteristics that cause the transaction to require specialized skill, knowledge, or effort.

A principal-agent relationship is any relationship in which one person or group, the principal(s), hires another person or group, the agent(s), to perform decision-making tasks.

A proxy battle is a fight between the firm's current management and one or more shareholder activists to obtain proxies (i.e., favorable votes) from shareholders.

The recovery value of the firm and its securities is the value of each security in the firm and is based on the time it will take the firm to emerge from the bankruptcy process and the condition in which it will emerge.

In a reorganization process (chapter 11 in U.S. bankruptcy laws), the firm's activities are preserved.

Selling insurance in this context refers to the economic process of earning relatively small returns for providing protection against risks, not the literal process of offering traditional insurance policies.

Shareholder activism refers to efforts by one or more shareholders to influence the decisions of a firm in a direction contrary to the initial recommendations of the firm's senior management.

Special situation funds also invest across a number of event styles are typically focused on equity securities, especially those with a spin-off or recent emergence from bankruptcy.

A spin-off occurs, when a publicly traded firm splits into two publicly traded firms, with shareholders in the original firm becoming shareholders in both firms.

A split-off occurs when investors have a choice to own Company A or B, as they are required to exchange their shares in the parent firm if they would like to own shares in the newly created firm.

Staggered board seats exist when instead of having all mambers fo a board elected at a single point in time, portions of the board are elected at regular intervals.

Stock-for-stock mergers acquire stock in the target firm using the stock of the acquirer and typically generate large initial increases in the share price of the target firm.

A toehold is a stake in a potential merger target taht is accumulated by a potential acquirer prior to the news of the merger attempt becoming widely known.

Traditional merger arbitrage generally uses leverage to buy the stock of the firm that is to be acquired and to sell short the stock of the firm that is the acquirer.

A wolf pack is a group of investors who may take similar positions to benefit from an activists' engagement with corporate management.