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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.

Suggested Citation

  • Massoud, Nadia & Nandy, Debarshi & Saunders, Anthony & Song, Keke, 2011. "Do hedge funds trade on private information? Evidence from syndicated lending and short-selling," Journal of Financial Economics, Elsevier, vol. 99(3), pages 477-499, March.
  • Handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:477-499
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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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 12:11:11

    Citations

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    Cited by:

    1. Ordu, Umut & Schweizer, Denis, 2015. "Executive compensation and informed trading in acquiring firms around merger announcements," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 260-280.
    2. Lim, Jongha & Minton, Bernadette A. & Weisbach, Michael S., 2014. "Syndicated loan spreads and the composition of the syndicate," Journal of Financial Economics, Elsevier, vol. 111(1), pages 45-69.
    3. repec:bla:jfnres:v:39:y:2016:i:4:p:329-358 is not listed on IDEAS
    4. Shive, Sophie & Yun, Hayong, 2013. "Are mutual funds sitting ducks?," Journal of Financial Economics, Elsevier, vol. 107(1), pages 220-237.
    5. Li, Xiaoyang & Lin, Shannon & Tucker, Alan L., 2016. "The curious case of converts," Global Finance Journal, Elsevier, vol. 31(C), pages 1-17.
    6. Jongha Lim & Bernadette A. Minton & Michael S. Weisbach, 2012. "Equity-Holding Institutional Lenders: Do they Receive Better Terms?," NBER Working Papers 17856, National Bureau of Economic Research, Inc.
    7. Gargano, Antonio & Rossi, Alberto G. & Wermers, Russ, 2015. "The freedom of information act and the race towards information acquisition," CFR Working Papers 16-02, University of Cologne, Centre for Financial Research (CFR).
    8. Massa, Massimo & Zhang, Lei, 2015. "Fire Sales and Information Advantage: When Informed Investor Helps," CEPR Discussion Papers 10536, C.E.P.R. Discussion Papers.
    9. 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, September.
    10. 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.
    11. repec:eee:finmar:v:33:y:2017:i:c:p:102-123 is not listed on IDEAS
    12. Huang, Ying Sophie & Chen, Carl R. & Kato, Isamu, 2017. "Different strokes by different folks: The dynamics of hedge fund systematic risk exposure and performance," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 367-388.
    13. Blau, Benjamin M. & Tew, Philip L., 2014. "Short sales and class-action lawsuits," Journal of Financial Markets, Elsevier, vol. 20(C), pages 79-100.
    14. Itzhak Ben-David & Justin Birru & Andrea Rossi, 2016. "Industry Familiarity and Trading: Evidence from the Personal Portfolios of Industry Insiders," NBER Working Papers 22115, National Bureau of Economic Research, Inc.
    15. repec:eee:jaecon:v:64:y:2017:i:2:p:313-339 is not listed on IDEAS
    16. Beyhaghi, Mehdi & Massoud, Nadia & Saunders, Anthony, 2017. "Why and how do banks lay off credit risk? The choice between retention, loan sales and credit default swaps," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 335-355.
    17. Chen, Jun & Kadapakkam, Palani-Rajan & Yang, Ting, 2016. "Short selling, margin trading, and the incorporation of new information into prices," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 1-17.
    18. 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.
    19. Berg, Tobias & Saunders, Anthony & Steffen, Sascha & Streitz, Daniel, 2016. "Mind the gap: The difference between U.S. and European loan rates," ZEW Discussion Papers 16-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    20. repec:eee:corfin:v:47:y:2017:i:c:p:23-45 is not listed on IDEAS
    21. Bastian von Beschwitz & Daniel Foos, 2016. "Banks' Equity Stakes and Lending : Evidence from a Tax Reform," International Finance Discussion Papers 1183, Board of Governors of the Federal Reserve System (U.S.).
    22. 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/DSF62, Tinbergen Institute.

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