Hedge fund attributes, insider behavior, and IPO volatility

Abstract

In this study, we use regression analysis to explore the influence of hedge fund and insider attributes on the volatility in the excess stock returns for 707 initial public offerings (IPOs). For these tests, we separate stock price volatility into systematic volatility (SVOL) and idiosyncratic volatility (IVOL). Our sample period is for 2004–2010 and thus encompasses the subprime mortgage crisis from 2007 to 2009. During this latter period, the number of hedge funds rose 36% despite the fact the overall size of hedge fund assets fell 38%. We find that hedge funds are more likely to influence systematic volatility and insider behavior is more likely to affect idiosyncratic volatility. SVOL is reduced when there are more hedge funds in the market, hedge fund returns are higher, hedge funds have more assets under management, and the proportion of hedge funds using the relative value (arbitrage) and event driven investment strategies are reduced. A reduction in IVOL is correlated with smaller insider ownership after the offering and greater declines in insider ownership due to the IPO. Our findings are valuable in helping investors and government regulators understand the role hedge funds and other insiders have on stock price volatility.