Non-Public Information and the Trading Activity of Hedge Funds

48 Pages Posted: 28 Sep 2011 Last revised: 12 Dec 2012

Lee J. Cohen

University of Georgia - Department of Finance

Date Written: December 10, 2012

Abstract

Informed trading reduces liquidity but speeds price discovery. I compare trading by shareholder activists with trading by the subset of hedge fund activists in lead-up periods before activists disclose adjustments in target firm ownership. Activist trading widens target bid-ask spreads and increases Amihud illiquidity (Amihud (2002)). These effects intensify as hedge funds trade physically closer to their targets. Close hedge fund trading before earnings surprises impounds the news into stock prices faster than other activists, reducing abnormal announcement return volatility by 29 percent. I conclude informed trading produces a trade-off between lower liquidity through adverse selection costs and more informative prices.

Keywords: Liquidity, shareholder activism, hedge funds, price discovery, informed trading

JEL Classification: G14, G18, G23

Suggested Citation

Cohen, Lee J., Non-Public Information and the Trading Activity of Hedge Funds (December 10, 2012). Available at SSRN: https://ssrn.com/abstract=1934053 or http://dx.doi.org/10.2139/ssrn.1934053

Lee J. Cohen (Contact Author)

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

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