The Role of Hedge Funds as Primary Lenders

27 Pages Posted: 29 Apr 2010 Last revised: 24 Jan 2011

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Costanza Meneghetti

West Virginia University

Abstract

We examine the role of hedge funds as primary lenders to corporate firms. We investigate both the reasons and the implications of hedge funds’ activities in the primary loan market. We examine the characteristics of firms that borrow from hedge funds and find that borrowers are primarily firms with lower profitability, lesser credit quality, and higher asymmetric information. Our results suggest that hedge funds serve as lenders of last resort to firms that may find it difficult to borrow from banks or issue public debt. We also examine the effect of hedge fund lending on the borrowing firms and find that borrowers’ profitability and creditworthiness improve subsequent to the loan. This beneficial effect of hedge fund lending is corroborated by our finding of positive abnormal returns for borrowers’ stocks around the loan announcement date. Overall, our findings are consistent with hedge funds adding value through their lending relationships and financial markets perceiving these activities as good news for the firms.

Keywords: Hedge funds, loan, lending relationship

JEL Classification: G2

Suggested Citation

Agarwal, Vikas and Meneghetti, Costanza, The Role of Hedge Funds as Primary Lenders. Review of Derivatives Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1596830

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Costanza Meneghetti (Contact Author)

West Virginia University ( email )

PO Box 6025
Morgantown, WV 26506
United States
304-293-7889 (Phone)

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