Test Specifications, Correct Modeling, and Sensitivity of Long-Run Abnormal Returns in Hedge Fund Target Firms

Abstract

Following the literature on test-specifications, correct-modeling, and detectability of long-run stock performance in event study framework, this study tests the performance of monthly stock returns of 589 firms targeted by 112 hedge funds over the period of January 2000 to December 2013. For an estimation window of (-12, 36) months, it addresses two fundamental questions; first, whether active targets (13D) outperform the passive targets (13G) in recent financial crisis; and second, whether long-horizon abnormal returns still pronounce when corrected for biases and test-specifications. To investigate these concerns, a number of methodologies including cumulative abnormal returns, buy-and-hold abnormal returns, and calendar -- time portfolio approach using various matching criteria are applied. Our initial findings suggest that 13D firms perform relatively better than 13G firms, however, underperform the PE targets. Moreover, when matching criteria are well-defined, then estimates appear generally significant with the improved power of the tests.