Do Hedge Funds Exploit Material Nonpublic Information? Evidence from Corporate Bankruptcies

81 Pages Posted: 11 Oct 2023 Last revised: 29 Feb 2024

See all articles by Wei Wang

Wei Wang

Queen's University - Smith School of Business

Yan Yang

Queen's University - Smith School of Business

Jingyu Zhang

Queen's University - Smith School of Business

Date Written: September 15, 2023

Abstract

Serving on the unsecured creditors' committee (UCC) of a bankrupt firm allows hedge funds to access material nonpublic information (MNPI), which can facilitate hedge funds' trading in other firms and across asset markets. We show that hedge funds have higher equity portfolio turnover and make large trades in the few quarters after joining a UCC. Hedge funds do not trade differently after accessing public information of bankrupt firms. Hedge funds’ large trades concentrate in firms that have close economic links to the bankrupt firm. Returns from large trades driven by access to MNPI are substantial.

Keywords: Bankruptcy, Unsecured Creditors' Committee, Hedge Funds, Material Nonpublic Information, Informed Trading

JEL Classification: G14, G23, G33

Suggested Citation

Wang, Wei and Yang, Yan and Zhang, Jingyu, Do Hedge Funds Exploit Material Nonpublic Information? Evidence from Corporate Bankruptcies (September 15, 2023). Available at SSRN: https://ssrn.com/abstract=4572759 or http://dx.doi.org/10.2139/ssrn.4572759

Wei Wang (Contact Author)

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Yan Yang

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Jingyu Zhang

Queen's University - Smith School of Business ( email )

Goodes Hall
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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