Do Hedge Funds Trade on Private Information? Evidence from Syndicated Lending and Short-Selling

52 Pages Posted: 27 Aug 2009 Last revised: 7 Jul 2010

See all articles by Nadia Massoud

Nadia Massoud

Melbourne Business School, University of Melbourne

Debarshi K. Nandy

Brandeis University - International Business School

Anthony Saunders

New York University - Leonard N. Stern School of Business

Keke Song

Melbourne Business School, the University of Melbourne

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2010

Abstract

This paper investigates important contemporary issues relating to hedge fund involvement in the syndicated loan market. In particular, we investigate the potential conflicts of interest that arise because of the absence of regulations relating to hedge funds’ dual holdings of loans and short positions in the equity of borrowing firms. We find evidence of possible short-selling on private information in the equity of the hedge fund borrowers prior to the public announcements of both loan originations and loan renegotiations (amendments). In addition, our results show that hedge funds are more likely to lend to highly leveraged, low credit quality firms, where access to private information is potentially most valuable and where trading on such information can lead to greater profits. Overall, our results have important implications for the current debate regarding regulation of the hedge fund industry.

Keywords: Hedge funds, short-selling, private information, syndicated loans, loan origination, loan renegotiation, loan amendment

JEL Classification: D82, G2, G38

Suggested Citation

Massoud, Nadia and Nandy, Debarshi K. and Saunders, Anthony and Song, Keke, Do Hedge Funds Trade on Private Information? Evidence from Syndicated Lending and Short-Selling (January 30, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1462561

Nadia Massoud (Contact Author)

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia
+61 3 9349 8130 (Phone)
+61 3 9349 8136 (Fax)

HOME PAGE: http://mbs.edu/facultyresearch/facultydirectory/Pages/NadiaMassoud.aspx

Debarshi K. Nandy

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Keke Song

Melbourne Business School, the University of Melbourne ( email )

200 Leicester Steet
Carlton, 3053
Australia

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