RFS Advance Access originally published online on November 13, 2006
Review of Financial Studies 2009 22(2):541-574; doi:10.1093/rfs/hhl045
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Hedge Funds as Investors of Last Resort?
University of Michigan
University of Michigan
University of Texas at Austin and NBER
Address correspondence to Clemens Sialm, McCombs School of Business, University of Texas at Austin, 1 University Station B6600, Austin, TX 78712-0217, or e-mail: clemens.sialm{at}mccombs.utexas.edu
JEL Classification: G14, G23, G32
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Abstract |
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Hedge funds have become important investors in public companies raising equity privately. Hedge funds tend to finance companies that have poor fundamentals and pronounced information 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.
We thank Sugato Bhattacharyya, Serdar Dinc, Amy Edwards, Ken French, Radha Gopalan, Michael Hertzel, David Hsieh, Marcin Kacperczyk, Arif Khurshed, Han Kim, Alok Kumar, Bob Kyle, Augustin Landier, Tom Nohel, Richard Priestley, Uday Rajan, Amit Seru, Sophie Shive, Tyler Shumway, Vijay Singal, Matt Spiegel (the editor), Jeremy Stein, Joe Warburton, Xueping Wu, Lu Zheng, an anonymous referee, and seminar participants at the 2004 European Financial Management Association, the 2005 European Finance Association, the 2006 Financial Intermediation Research Conference, the Board of Governors of the Federal Reserve System, the U.S. Securities and Exchange Commission, and the University of Michigan for helpful comments and discussions. We are very grateful to Sagient Research for providing us with the PIPEs data. A previous version of this paper was circulated as "PIPE Dreams? The Performance of Companies Issuing Equity Privately."