Using a sample of mergers & acquisitions and hedge-fund holdings from 1995 to 2009, we find
that pre-merger hedge-fund holdings in target firms increase proportion of payment made in
cash, but not the premium. In the presence of hedge-fund holdings, higher unexpected cash
payment leads to a higher likelihood of deal completion, shortens deal duration, but has no
effects on premium. At the same time, target firms held by high-turnover hedge funds are more
likely to accept bidders’ overvalued equity. Overall, hedge funds holding target firms shape
merger payment in ways that do not necessarily benefit target firms’ long-term shareholders.