Hedge Funds as Investors of Last Resort?

Brophy, David J.; Ouimet, Paige; Sialm, Clemens

Hedge Funds as Investors of Last Resort?

Review of Financial Studies, Forthcoming

EFA 2005 Moscow Meetings

55 Pages Posted: 7 Aug 2005

See all articles by David J. Brophy

David J. Brophy

University of Michigan, Stephen M. Ross School of Business

Paige Ouimet

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

There are 2 versions of this paper

Abstract

Hedge funds have become important investors in public companies raising equity privately. Hedge funds tend to finance companies that have poor fundamentals and pronounced informational asymmetries. To compensate for these shortcomings, hedge funds protect themselves by requiring substantial discounts, negotiating repricing rights, and entering into short positions of the underlying stocks. We find that companies that obtain financing from hedge funds significantly underperform companies that obtain financing from other investors during the following two years. We argue that hedge funds are investors of last resort and provide funding for companies that are otherwise constrained from raising equity capital.

Keywords: Private Placements, Security Design, PIPE Securities, Hedge Funds

JEL Classification: G14, G23, G32

Suggested Citation: Suggested Citation

Brophy, David J. and Ouimet, Paige and Sialm, Clemens, Hedge Funds as Investors of Last Resort?. Review of Financial Studies, Forthcoming; EFA 2005 Moscow Meetings. Available at SSRN: https://ssrn.com/abstract=782791