Content area
Full Text
1. Introduction
Recent research by Hull et al. (2018) finds significant statistical associations between hedge fund variables (HFVs), consisting of hedge fund strategies and a leverage tactic, and short-run daily buy and hold abnormal returns (BHARs) for seasoned equity offering (SEO). The tests of Hull et al. cover a 30-day window around registration dates for SEO firms. In particular, they discover that event-driven and equity hedge strategies are significant for all tests. They also demonstrate HFVs fare better than nonhedge fund variables (NFVs). For NFVs, the strong statistical performance is found for insider ownership proportion (and the change in this proportion brought about by the SEO), underpricing, size and secondary selling.
In this paper, we extend short-run SEO research on the role of HFVs by examining this role for a six-year window around SEO announcement months. In our extension, we investigate this research question:
Can hedge fund stratagems be significantly related to long-run stock returns around SEO announcement months and perform competitively compared to nonhedge independent variables?
In exploring this question, we use the sample described by Hull et al. (2018) that contains 1,189 SEOs from January 1999 through December 2010. Because this is a long-run study covering three years before and three years after the announcement month (month 0), we use data from January 1996 through December 2013. Using long-run SEO monthly returns causes the use of hedge fund monthly data to be magnified by 72 since our long-run regression tests cover 36 months before month 0 and 36 months after month 0. This compares to Hull et al. who only use hedge fund data for month 0 for their short-run regression tests.
This study has two key assumptions. First, we assume hedge fund managers can identify the long-run future performance of SEO firms and strategize accordingly. This is not to say that all SEO firms will be targeted and successfully identified but enough can be profitably recognized for our empirical purposes. Second, we assume the proportion of hedge funds using a strategy changes in a hypothesized manner to take advantage of profitable opportunities from long and short positions. Of importance to this latter supposition, Hull et al. (2018) document that the proportion of hedge...