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.
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.
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.
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.
Hedge fund managers can use long-run strategies to capitalize on price movements around significant corporate events.
Larger institutional traders have investment advantages due to superior knowledge and greater ability to manipulate prices.
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.
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