Do Hedge Funds Possess Private Information about IPO Stocks? Evidence from Post-IPO Holdings

Forthcoming, Review of Asset Pricing Studies

73 Pages Posted: 19 Jun 2014 Last revised: 31 Aug 2017

See all articles by Hong Qian

Hong Qian

Oakland University - Department of Accounting and Finance

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: June 24, 2017

Abstract

Using hedge funds’ holdings of IPO stocks, we find that stocks with abnormally high hedge fund holdings, based on stock and deal characteristics, yield abnormal returns. Moreover, hedge funds are able to sell IPO stocks in a timely fashion before long-run underperforming periods start, suggesting that hedge funds possess information advantages in IPO stocks. Finally, we address the question of where hedge funds may have obtained their information advantages. Hedge funds earn higher abnormal returns in “connected” stocks when their prime brokers also serve as IPO underwriters, indicating that such connections enable hedge funds to make more informed investment decisions in IPO stocks.

Keywords: Initial Public Offerings, Hedge Funds, Private Information, Underwriters, Prime Brokers

JEL Classification: G11, G14, G23, G24, G30, G32

Suggested Citation

Qian, Hong and Zhong, Zhaodong, Do Hedge Funds Possess Private Information about IPO Stocks? Evidence from Post-IPO Holdings (June 24, 2017). Forthcoming, Review of Asset Pricing Studies, Available at SSRN: https://ssrn.com/abstract=2456025 or http://dx.doi.org/10.2139/ssrn.2456025

Hong Qian

Oakland University - Department of Accounting and Finance ( email )

347 Elliott Hall
275 Varner Dr.
Rochester, MI 48309
United States

Zhaodong Zhong (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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