Belk College research paper discovers hedge fund activism can benefit banks’ minority customers

Banks targeted by hedge fund activism become more likely to sign off on mortgage loans for minority customers, according to the research paper “The Color of Hedge Fund Activism” published online in the journal Management Science in late September.

“When banks face pressure from hedge funds to grow profits, they have strong incentive to improve their processes and close the racial gap between home mortgage approvals,” said lead researcher Yongqiang Chu. This pressure can lead to benefits for borrowers, in what could perhaps be viewed as an unintended consequence.

“Banks learn more about their customers and try to better understand their creditworthiness,” Chu said. “Collecting better data means they rely less on race as a signal for lending decisions or as a proxy for risk. Meanwhile, when benefits from the more effective decisions on lending outweigh the costs of obtaining data, the banks are more profitable.”

The impact on potential borrowers from these hedge fund actions is sizeable, said Chu, the Childress Klein Distinguished Professor of Real Estate and Urban Economics and professor of finance with the Belk College of Business. “We see a four percentage-point decrease in the denial rate for minority borrowers,” he said. “This amounts to about 20% of the unconditional average denial rate for minority borrowers.”

Historically, hedge funds buy a significant amount of a company’s stock and use that influence to push for changes within that company. When these powerful hedge funds use their muscle to influence how a company is run, they focus on the target companies’ profitability. The activists take into account financial outcomes and regulatory compliance concerns that increase costs or thwart future plans, such as for selling the company.

Read more on the Belk College of Business website at https://belkcollege.charlotte.edu/2024/10/18/hedge-fund-activism-can-benefit-banks-minority-customers/.