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Do Hedge Funds Possess Private Information about IPO Stocks? Evidence from Post-IPO Holdings

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  • Hong Qian
  • Zhaodong (Ken) Zhong

Abstract

Using hedge funds’ holdings of IPO stocks, we find that stocks with abnormally high hedge fund holdings, based on stock and deal characteristics, yield abnormal returns. Moreover, hedge funds are able to sell IPO stocks in a timely fashion before long-run underperforming periods start, suggesting that hedge funds possess information advantages in IPO stocks. Finally, we address the question of where hedge funds may have obtained their information advantages. Hedge funds earn higher abnormal returns in “connected” stocks when their prime brokers also serve as IPO underwriters, indicating that such connections enable hedge funds to make more informed investment decisions in IPO stocks.Received December 31, 2014; editorial decision May 27, 2017 by Editor Wayne Ferson.

Suggested Citation

  • Hong Qian & Zhaodong (Ken) Zhong, 2018. "Do Hedge Funds Possess Private Information about IPO Stocks? Evidence from Post-IPO Holdings," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 8(1), pages 117-152.
    • Handle: RePEc:oup:rasset:v:8:y:2018:i:1:p:117-152.
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    File URL: http://hdl.handle.net/10.1093/rapstu/rax018
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    Cited by:

    1. Hiraki, Takato & Honda, Toshiki & Ito, Akitoshi & Liu, Ming, 2021. "Banks, IPO underwriting, and allocation in Japan," Journal of Economics and Business, Elsevier, vol. 116(C).
    2. Kumar, Nitish & Mullally, Kevin & Ray, Sugata & Tang, Yuehua, 2020. "Prime (information) brokerage," Journal of Financial Economics, Elsevier, vol. 137(2), pages 371-391.
    3. Hong, Xin & Zhuang, Zhuang & Kang, Di & Wang, Zhibin, 2019. "Do corporate site visits impact hedge fund performance?," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 113-128.
    4. Chung, Sung Gon & Kulchania, Manoj & Teo, Melvyn, 2021. "Hedge funds and their prime broker analysts," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 141-158.
    5. George O. Aragon & Ji-Woong Chung & Byoung Uk Kang, 2023. "Do Prime Brokers Matter in the Search for Informed Hedge Fund Managers?," Management Science, INFORMS, vol. 69(8), pages 4932-4952, August.
    6. Eliezer Fich & Viktoriya Lantushenko & Clemens Sialm, 2019. "Institutional Trading Around M&A Announcements," NBER Working Papers 25814, National Bureau of Economic Research, Inc.
    7. Mullally, Kevin A., 2022. "Outside ownership in the hedge fund industry," Journal of Banking & Finance, Elsevier, vol. 144(C).

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