Hedge fund stratagems and long-run SEO firm performance

Abstract

Purpose The 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/approach The 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. Findings Three 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/implications This 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 implications Hedge fund managers can use long-run strategies to capitalize on price movements around significant corporate events. Social implications Larger institutional traders have investment advantages due to superior knowledge and greater ability to manipulate prices. Originality/value This 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.

Stock derivatives and seasoned equity offerings

“…Loughran and Ritter (1995) find that SEO firms average annual returns of only 7% for the five years after the SEO while Loughran and Ritter (1997) discover that SEO firms have a 70% increase in stock value for the year prior to the SEO offering. Later SEO studies (Cline and Fu, 2010;Hull et al, 2017Hull et al, , 2019 confirm the above stock price patterns. For example, Hull et al (2017) find a median of 40% for the year before the announcement month and a median close to 0% for a year after the announcement month.…”