IDEAS home Printed from https://ideas.repec.org/a/kap/jmgtgv/v19y2015i1p25-46.html
   My bibliography  Save this article

Price changes around hedge fund trades: disentangling trading and disclosure effects

Author

Listed:
  • Ettore Croci
  • Giovanni Petrella

Abstract

Previous studies find positive stock market reactions around announcements that hedge funds own large equity stakes in companies and use this evidence to support the hypothesis that hedge fund activism creates value. A concurrent explanation is that the price reaction reflects, at least in part, the market impact associated with hedge fund trades. We exploit the blockholder’s legal filing requirements with the Italian regulatory authority (CONSOB) to separately examine trading and disclosure effects associated with hedge fund trades. Trading effects are related to hedge funds’ buying activity on the market, whereas disclosure effects are related to the possibility that the market anticipates future activism and reacts to the announcement of hedge funds’ ownership. The trading effect is significantly larger than the disclosure effect. This result implies that the price impact associated with hedge fund purchases explains a large portion of the price reaction attributed exclusively to hedge fund activism in previous studies. We also find that trading by hedge funds produces a permanent change in the stock price, which occurs in equal part both prior to and concurrent to the trading activity. The execution strategy used by hedge funds to accumulate their position (on exchange or downstairs trading vs. block trading or upstairs) affects both the size and the temporal distribution of the trading effect. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Ettore Croci & Giovanni Petrella, 2015. "Price changes around hedge fund trades: disentangling trading and disclosure effects," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(1), pages 25-46, February.
    • Handle: RePEc:kap:jmgtgv:v:19:y:2015:i:1:p:25-46
    DOI: 10.1007/s10997-013-9267-4
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10997-013-9267-4
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10997-013-9267-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ajinkya, Bipin B. & Jain, Prem C., 1989. "The behavior of daily stock market trading volume," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 331-359, November.
    2. Sanders, Ralph W. & Zdanowicz, John S., 1992. "Target Firm Abnormal Returns and Trading Volume around the Initiation of Change in Control Transactions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(1), pages 109-129, March.
    3. April Klein & Emanuel Zur, 2009. "Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors," Journal of Finance, American Finance Association, vol. 64(1), pages 187-229, February.
    4. Adrian Blundell-Wignall, 2007. "An Overview of Hedge Funds and Structured Products: Issues in Leverage and Risk," Financial Market Trends, OECD Publishing, vol. 2007(1), pages 37-57.
    5. Nicole Boyson & Robert Mooradian, 2011. "Corporate governance and hedge fund activism," Review of Derivatives Research, Springer, vol. 14(2), pages 169-204, July.
    6. Kraus, Alan & Stoll, Hans R, 1972. "Price Impacts of Block Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 27(3), pages 569-588, June.
    7. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
    8. Davis, Gerald F. & Kim, E. Han, 2007. "Business ties and proxy voting by mutual funds," Journal of Financial Economics, Elsevier, vol. 85(2), pages 552-570, August.
    9. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April.
    10. Clifford, Christopher P., 2008. "Value creation or destruction? Hedge funds as shareholder activists," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 323-336, September.
    11. Stuart L. Gillan & Laura T. Starks, 2007. "The Evolution of Shareholder Activism in the United States," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 55-73, January.
    12. Alon Brav & Wei Jiang & Frank Partnoy & Randall Thomas, 2008. "Hedge Fund Activism, Corporate Governance, and Firm Performance," Journal of Finance, American Finance Association, vol. 63(4), pages 1729-1775, August.
    13. Greenwood, Robin & Schor, Michael, 2009. "Investor activism and takeovers," Journal of Financial Economics, Elsevier, vol. 92(3), pages 362-375, June.
    14. Marguerite Schneider & Lori Ryan, 2011. "A review of hedge funds and their investor activism: do they help or hurt other equity investors?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 15(3), pages 349-374, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wei‐Huei Hsu & Sian Owen & Jo‐Ann Suchard, 2020. "The value of ongoing venture capital investment to newly listed firms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1327-1349, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mark R. DesJardine & Rodolphe Durand, 2020. "Disentangling the effects of hedge fund activism on firm financial and social performance," Strategic Management Journal, Wiley Blackwell, vol. 41(6), pages 1054-1082, June.
    2. Oehler, Andreas & Schmitz, Jonas Tobias, 2021. "Does intensified communication of hedge funds with letters affect abnormal returns?," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 127-142.
    3. Thomas Smythe & Chris McNeil & Philip English, 2015. "When does CalPERS’ activism add value?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(4), pages 641-660, October.
    4. von Lilienfeld-Toal, Ulf & Schnitzler, Jan, 2020. "The anatomy of block accumulations by activist shareholders," Journal of Corporate Finance, Elsevier, vol. 62(C).
    5. Wolfgang Bessler & Wolfgang Drobetz & Julian Holler, 2015. "The Returns to Hedge Fund Activism in Germany," European Financial Management, European Financial Management Association, vol. 21(1), pages 106-147, January.
    6. Ben Arfa, Nouha & Karmani, Majdi & Labaronne, Daniel, 2017. "Antecedents of hedge fund activism in French listed target firms," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1315-1326.
    7. Barbara Voußem & Utz Schäffer & Denis Schweizer, 2015. "Top management turnover under the influence of activist investors," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(3), pages 709-739, August.
    8. Denes, Matthew R. & Karpoff, Jonathan M. & McWilliams, Victoria B., 2017. "Thirty years of shareholder activism: A survey of empirical research," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 405-424.
    9. Yvan Allaire & François Dauphin, 2016. "The game of ‘activist’ hedge funds: Cui bono?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 13(4), pages 279-308, November.
    10. Simon Rafaqat & Sana Rafaqat & Sahil Rafaqat & Saoul Rafaqat & Dawood Rafaqat, 2023. "Shareholder Activism and Firm Performance: A Review," Journal of Economics and Behavioral Studies, AMH International, vol. 14(4), pages 31-41.
    11. Boyson, Nicole M. & Gantchev, Nickolay & Shivdasani, Anil, 2017. "Activism mergers," Journal of Financial Economics, Elsevier, vol. 126(1), pages 54-73.
    12. Tang, Tingfeng, 2020. "Hedge fund activism and corporate innovation," Economic Modelling, Elsevier, vol. 85(C), pages 335-348.
    13. Vincent C. Ma & John S. Liu, 2016. "Exploring the research fronts and main paths of literature: a case study of shareholder activism research," Scientometrics, Springer;Akadémiai Kiadó, vol. 109(1), pages 33-52, October.
    14. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    15. Renneboog, L.D.R. & Szilagyi, P.G., 2009. "Shareholder Activism through the Proxy Process," Other publications TiSEM cc25d736-2965-4511-b100-1, Tilburg University, School of Economics and Management.
    16. Hamao, Yasushi & Matos, Pedro, 2018. "U.S.-style investor activism in Japan: The first ten years?," Journal of the Japanese and International Economies, Elsevier, vol. 48(C), pages 29-54.
    17. Gantchev, Nickolay, 2013. "The costs of shareholder activism: Evidence from a sequential decision model," Journal of Financial Economics, Elsevier, vol. 107(3), pages 610-631.
    18. Ryan Flugum & Matthew E. Souther, 2020. "External monitoring and returns to hedge fund activist campaigns," Review of Financial Economics, John Wiley & Sons, vol. 38(1), pages 97-140, January.
    19. Krishnan, C.N.V. & Partnoy, Frank & Thomas, Randall S., 2016. "The second wave of hedge fund activism: The importance of reputation, clout, and expertise," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 296-314.
    20. Jochen Hartmann & Matthias Pelster & Soenke Sievers, 2022. "Can the market identify prosperous activist engagements? Evidence from announcement and long-term buy-and-hold returns," Working Papers Dissertations 100, Paderborn University, Faculty of Business Administration and Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jmgtgv:v:19:y:2015:i:1:p:25-46. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.