Price Changes Around Hedge Fund Trades: Disentangling Trading and Disclosure Effects

Journal of Management & Governance, Forthcoming

30 Pages Posted: 1 Nov 2011 Last revised: 5 Apr 2013

See all articles by Ettore Croci

Ettore Croci

Catholic University of the Sacred Heart of Milan

Giovanni Petrella

Università Cattolica del Sacro Cuore

Date Written: March 29, 2013

Abstract

Previous studies find positive stock market reactions around announcements that hedge funds own large equity stakes in companies and use this evidence to support the hypothesis that hedge fund activism creates value. A concurrent explanation is that the price reaction reflects, at least in part, the market impact associated with hedge fund trades. We exploit the blockholder's legal filing requirements with the Italian regulatory authority (CONSOB) to separately examine trading and disclosure effects associated with hedge fund trades. Trading effects are related to hedge funds’ buying activity on the market, whereas disclosure effects are related to the possibility that the market anticipates future activism and reacts to the announcement of hedge funds’ ownership. The trading effect is significantly larger than the disclosure effect. This result implies that the price impact associated with hedge fund purchases explains a large portion of the price reaction attributed exclusively to hedge fund activism in previous studies. We also find that trading by hedge funds produces a permanent change in the stock price, which occurs in equal part both prior to and concurrent to the trading activity. The execution strategy used by hedge funds to accumulate their position (on exchange or downstairs trading vs. block trading or upstairs) affects both the size and the temporal distribution of the trading effect.

Keywords: hedge funds, Italian stock market, price impact, disclosure

JEL Classification: G14, G23, G32

Suggested Citation

Croci, Ettore and Petrella, Giovanni, Price Changes Around Hedge Fund Trades: Disentangling Trading and Disclosure Effects (March 29, 2013). Journal of Management & Governance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1951788 or http://dx.doi.org/10.2139/ssrn.1951788

Ettore Croci (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Giovanni Petrella

Università Cattolica del Sacro Cuore ( email )

Largo Gemelli 1
Milano, 20123
Italy
+39 02 72343007 (Phone)

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