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
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: Suggested Citation