January 28, 2007
Hedge Funds Borrow Shares on Record Dates: Should We Care?
Friday's Wall Street Journal had as it lead story the article by Professor Hue and Black on shorting stock around firm "record dates." The concern is that hedge funds borrow stock to vote it and, thereby divorce the economic effects of the vote from the stock itself. I have written on this and have noted that the concern is not justified. Those who loan the stock charge a fee and the fee is connected economic effects to the vote. A borrower who wants to vote against the company's best interest will, in theory,have to pay a higher fee or just get denied the shares altogether. There is evidence that both occur. Further, evidence that fees around record dates stay the same may be evidence that those who borrow, as is recognized by those who loan, rarely vote against the interests of the firm but usually vote with those interests. The only real threat is to the 5 percent disclosure rule of 13(d), a rule with a ten day window anyway (which has not been tightened because the policy foundations of the rule are questionable). This concern is overblown.
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