Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, January 27, 2008

Huang on Hedge Fund's Role in LBOs

When Bad Stocks Make Good Investments: The Role of Hedge Funds in Leveraged Buyouts, by JIEKUN HUANG, Boston College - Department of Finance, was recently posted on SSRN.  Here is the abstract:

I examine the role of hedge funds in leveraged buyout transactions. I find significant increases in hedge fund holdings of buyout targets before the announcement. The presence of hedge funds as shareholders of the target firm prior to the announcement is positively related to initial buyout premiums. This effect is robust and economically significant: A two standard deviation increase in the hedge fund ownership of the target before the announcement is associated with an increase of 7% in premiums. I also show that this relationship is stronger for firms with less liquid stocks. Moreover, for low-premium offers, greater hedge fund net buying during the announcement quarter is associated with a greater likelihood and magnitude of an upward revision of the premium. The evidence is consistent with the hypothesis that hedge funds play an active and strategic role and increase the wealth of target shareholders.

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