Skill, Luck and the Multiproduct Firm: Evidence from Hedge Funds

45 Pages Posted: 19 Feb 2009 Last revised: 1 Oct 2012

Rui J.P. de Figueiredo Jr.

University of California, Berkeley - Business & Public Policy Group

Evan Rawley

Columbia Business School - Management

Date Written: October 18, 2010

Abstract

We propose that when managers require external investment to expand, higher skilled firms will be more likely to diversify, even though managers can exploit asymmetric information about their ability to raise capital from investors. We formalize this intuition in an equilibrium model and test our predictions using a large survivor-bias-free panel dataset on the hedge fund industry 1994-2006. We show that excess returns fall following diversification—defined as the launch of new fund—but are six basis points higher per month per unit of risk in diversified firms compared to a matched sample of focused firms. The evidence suggests that managers exploit asymmetric information about their own ability to time diversification decisions, but the discipline of markets ensures that better firms diversify on average. The results provide large sample empirical evidence that agency effects and firm capabilities both influence diversification decisions.

Keywords: Diversification, reputation, performance, ability

JEL Classification: G23, L23, M21

Suggested Citation

de Figueiredo, Rui J.P. and Rawley, Evan, Skill, Luck and the Multiproduct Firm: Evidence from Hedge Funds (October 18, 2010). Atlanta Competitive Advantage Conference Paper. Available at SSRN: https://ssrn.com/abstract=1345157 or http://dx.doi.org/10.2139/ssrn.1345157

Rui José P. De Figueiredo Jr.

University of California, Berkeley - Business & Public Policy Group ( email )

545 Student Services Building
Berkeley, CA 94720
United States
510-642-6452 (Phone)
510-643-1412 (Fax)

Evan Rawley (Contact Author)

Columbia Business School - Management ( email )

3022 Broadway
New York, NY 10027
United States

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