Hedge fund variables and short-run SEO returns

Abstract

Purpose

The purpose of this paper is to determine if hedge fund variables (HFVs) are associated with short-run daily buy and hold abnormal returns (BHARs) for a 30-day window around announcement dates for seasoned equity offerings (SEOs).

Design/methodology/approach

This paper utilizes the event study metric that computes BHARs. These BHARs are used in a regression model as dependent variables with HFVs and nonhedge fund variables (NFVs) as independent variables. For regression tests, standard errors are clustered at the month level.

Findings

This paper offers three new findings. First, HFVs are significantly associated with SEO BHARs. Second, HFVs are capable being associated with stronger statistical significance compared to NFVs. Third, not using HFVs can produce an omitted-variable bias.

Research limitations/implications

This paper does not have information on which individual hedge funds use a strategy during the month of the offering but only the proportion of hedge funds that do. A research implication is the proportion can be associated with SEO BHARs in a fashion predicted based on a long or short position.

Practical implications

Hedge funds can use trading strategies to capitalize on established patterns of price behavior.

Social implications

Hedge funds enjoy a trading advantage over smaller investors.

Originality/value

This paper is the first study to document the association between hedge fund stratagems and stock returns around a major corporate event. It shows researchers should consider institutional trading strategies when studying the market response to a major corporate event.

Citation

Hull, R.M., Kwak, S. and Walker, R. (2018), "Hedge fund variables and short-run SEO returns", International Journal of Managerial Finance, Vol. 14 No. 3, pp. 322-341. https://doi.org/10.1108/IJMF-09-2017-0194