Hedge fund stratagems and long-run SEO firm performance

Abstract

PurposeThe purpose of this paper is to explore if hedge fund variables (HFVs) are associated with long-run compounded raw returns (CRRs) for seasoned equity offering (SEO) firms for a six-year window around the offering month for firms undergoing SEOs.Design/methodology/approachThe event study methodology is used to calculate long-run CRRs that are used in a regression model as dependent variables. Independent variables include HFVs and nonhedge fund variables (NFVs) with standard errors clustered at the month level.FindingsThree new long-run findings, consistent with recent short-run findings, are offered. First, HFVs are significantly associated with long-run CRRs for SEO firms. Second, HFVs perform competitively compared to NFVs. Third, a potential omitted-variable bias results if HFVs are not used.Research limitations/implicationsThis research assumes that hedge fund managers can identify good (poor) performing SEO firm that allow for profitable long (short) positions. The proportion of hedge funds using a strategy will change in the hypothesized manner needed to make profit.Practical implicationsHedge fund managers can use long-run strategies to capitalize on price movements around significant corporate events.Social implicationsLarger institutional traders have investment advantages due to superior knowledge and greater ability to manipulate prices.Originality/valueThis research is the first study to detail the significant association between hedge fund stratagems and long-run stock returns for firms undergoing key corporate events. This study demonstrates the need to consider hedge fund strategies when trying to understand stock price movements.