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

63 Pages Posted: 8 Sep 2009

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

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Date Written: August 2009

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 due to the lack of regulation relating to hedge funds permissible dual holding of loans and shortpositions in the equity of borrowing firms. We find evidence of possible trading on private information in the equity of the hedge fund borrowers prior to the public announcements of both loan origination and loan renegotiation (amendments). In addition, our results show that hedgefunds are more likely to lend to highly leveraged, low credit quality firms in comparison to bank lenders. Our results have important implications for the current debate regarding regulation of the hedge fund industry.

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 (August 2009). NYU Working Paper No. FIN-09-006, Available at SSRN: https://ssrn.com/abstract=1469125

Nadia Massoud

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
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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 )

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United States
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212-995-4220 (Fax)

Keke Song

Melbourne Business School, the University of Melbourne ( email )

200 Leicester Steet
Carlton, 3053
Australia

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