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Do hedge funds trade on private information? Evidence from syndicated lending and short-selling

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  • Massoud, Nadia
  • Nandy, Debarshi
  • Saunders, Anthony
  • Song, Keke

Abstract

This paper investigates an important contemporary issue relating to the involvement of hedge funds in the syndicated loan market. In particular, we investigate the potential conflicts of interest that arise when hedge funds make syndicated loans and take short positions in the equity of borrowing firms. We find evidence consistent with the short-selling of the equity of the hedge fund borrowers prior to public announcements of both loan originations and loan amendments. We also find that hedge funds are more likely to lend to highly leveraged, lower credit quality firms, where access to private information is potentially the most valuable and where trading on such information could lead to enhanced profits. Overall, our results have important implications for the current debate regarding regulating the hedge fund industry.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 99 (2011)
Issue (Month): 3 (March)
Pages: 477-499

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Handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:477-499

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Hedge funds Short-selling Private information Conflict of interest Syndicated loans;

References

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  1. Acharya, Viral V. & Johnson, Timothy C., 2007. "Insider trading in credit derivatives," Journal of Financial Economics, Elsevier, vol. 84(1), pages 110-141, April.
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  16. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  17. Steven Drucker & Manju Puri, 2009. "On Loan Sales, Loan Contracting, and Lending Relationships," Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2635-2672, July.
  18. Robert M. Bushman & Abbie J. Smith & Regina Wittenberg-Moerman, 2010. "Price Discovery and Dissemination of Private Information by Loan Syndicate Participants," Journal of Accounting Research, Wiley Blackwell, vol. 48(5), pages 921-972, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Lorsque les hedge funds prêtent à des entreprises ... pour ensuite parier à la baisse via de l'information privée !
    by contact@captaineconomics.fr (Le Captain') in Captain Economics on 2013-05-16 07:11:11
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Cited by:
  1. Shive, Sophie & Yun, Hayong, 2013. "Are mutual funds sitting ducks?," Journal of Financial Economics, Elsevier, vol. 107(1), pages 220-237.
  2. Lim, Jongha & Minton, Bernadette A. & Weisbach, Michael S., 2012. "Equity-Holding Institutional Lenders: Do They Receive Better Terms?," Working Paper Series 2012-05, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  3. Henk Berkman & Michael McKenzie & Patrick Verwijmeren, 2013. "Hole in the Wall: Informed Short Selling ahead of Private Placements," Tinbergen Institute Discussion Papers 13-153/IV/62, Tinbergen Institute.
  4. Chakrabarty, Bidisha & Shkilko, Andriy, 2013. "Information transfers and learning in financial markets: Evidence from short selling around insider sales," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1560-1572.
  5. Vikas Agarwal & Costanza Meneghetti, 2011. "The role of hedge funds as primary lenders," Review of Derivatives Research, Springer, vol. 14(2), pages 241-261, July.
  6. K. Stephen Haggard & (Grace) Qing Hao & Ying Jenny Zhang, 2012. "Are hedge funds guilty of manipulative short-selling?," Managerial Finance, Emerald Group Publishing, vol. 38(11), pages 1048-1066, November.
  7. Jongha Lim & Bernadette A. Minton & Michael Weisbach, 2012. "Syndicated Loan Spreads and the Composition of the Syndicate," NBER Working Papers 18356, National Bureau of Economic Research, Inc.

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