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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31422
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| Title: | Hedge Funds in M&A Deals: Is there Exploitation of Private Information? |
| Authors: | Dai, Rui
Massoud, Nadia
Nandy, Debarshi
Saunders, Anthony |
| Issue Date: | 9-Jan-2012 |
| Series/Report no.: | FIN-11-047 |
| Abstract: | This paper investigates recent allegations regarding the misuse of
private insider information by hedge funds prior to the public
announcement of M&A deals. We analyze this issue by using a unique
and comprehensive dataset which allows us to analyze the trading pattern
of hedge funds around corporate mergers and acquisitions in both the
equity and derivatives markets. In general, our results are consistent
with hedge funds, with short-term investment horizons (henceforth,
short-term hedge funds) taking advantage of private information and
engaging in trading based on such information. We show that short-term
hedge funds holdings of a target’s shares in the quarter prior to
the M&A announcement date are positively related to the
profitability of the deal as measured by the target premium. In
addition, we also find that the target price run-up before the deal
announcement date is significantly greater for deals with greater short
term hedge fund holdings. We also find evidence consistent with informed
abnormal short selling and put buying in the corresponding
acquirer’s stock prior to M&A announcements. This is
particularly evident when hedge funds take larger stakes in target
firms. In addition, we show that such a strategy is potentially very
profitable. We consider alternative explanations for such short term
hedge fund holdings in target firms; however our results seem
inconsistent with these alternative explanations but rather, seem to be
consistent with trading based on insider information. Overall, our
results have important implications regarding the recent policy debate
on hedge fund regulation. |
| URI: | http://hdl.handle.net/2451/31422 |
| Appears in Collections: | Finance Working Papers
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