Does the Disclosure of a Hedge Fund Stock Sale Influence Respective Stock Returns?

Abstract

The author investigates stock returns surrounding activism-related stock sales. Previous studies focus on the last sale of the hedge fund, while this article examines the initial sale of a target’s stock. The author determines abnormal stock returns using factor models and compares the target’s stock return with the performance of the S&P 500 Index. The additional method might be more intuitive for unsophisticated investors in comparison with the complexity of the factor models. He shows that a hedge fund’s initial sale of stock led to stagnating abnormal returns when activists were successful and negative abnormal returns otherwise. Furthermore, he reveals that target stocks experience similar returns as the S&P 500 and the Russell 1000 Value Index subsequent to the hedge fund’s sale disclosure. The results are relevant for existing shareholders of a target company.

TOPICS: Real assets/alternative investments/private equity, information providers/credit ratings, security analysis and valuation, performance measurement

Key Findings

• ▪ Previous studies focus on hedge funds’ last disclosure of the sale of stock in an activist position. This article examines the initial sale of target company stocks, which may indicate the inception of a hedge fund’s complete exit.

• ▪ Hedge funds’ initial stock sales led to stagnating abnormal returns when activists were successful and negative abnormal returns otherwise. This result is consistent with pre-existing evidence on last-sale disclosures of hedge funds.

• ▪ From the day after the sale-related disclosure, target stocks perform, on average, like the S&P 500 Index. This finding evokes questions about whether the remaining shareholders should transfer their stock investment into index funds.