Rabih Moussawi

Hedge Fund Stock Trading in the Financial Crisis of 2007-2009

We document a drastic reduction in hedge fund stock ownership during the recent financial crisis. In the two quarters around the Lehman collapse (2008Q3-Q4), hedge funds cut their equity holdings by about 29% and nearly every fourth fund dumped more than 40% of its equity portfolio in each quarter. We directly establish that investor redemptions were a primary driver of these selloffs and provide suggestive evidence that pressure from lenders was also an important determinant of stock sales. These channels were more relevant for funds with low restrictions on investors’ withdrawals and low bargaining power vis-a-vis their brokers. Also consistent with fire sales, hedge funds were more likely to sell high-volatility stocks and liquid stocks. Finally, we show indirect evidence suggesting that part of the stock selloffs occurred because hedge funds reallocated capital to other assets in a flight to quality or in pursuit of profit opportunities. _____________________ * We thank Viral Acharya, Giovanni Barone-Adesi, Alexander Eisele, Vyacheslav Fos, Craig Furfine, YeeJin Jang, Pete Kyle, Jose-Miguel Gaspar, Massimo Massa, Loriana Pelizzon, Alberto Plazzi, Steven Ongena, Tarun Ramadorai, Ronnie Sadka, Rene Stulz, Dimitri Vayanos, and seminar and conference participants at the Ohio State University, the 2 Annual Conference on Hedge Funds in Paris, the 3 Erasmus Liquidity Conference, the Wharton/FIRS pre-conference, the FIRS conference (Florence), LUISS University (Rome), and the C.R.E.D.I.T. Conference (Venice), for helpful comments.

Do ETFs Increase Volatility

Recent literature suggests that trading by institutional investors may affect the first and second moments of returns. Elaborating on this intuition, we conjecture that arbitrageurs can propagate liquidity shocks between related markets. The paper provides evidence in this direction by studying Exchange Traded Funds (ETFs), an asset class that has gained paramount importance in recent years. We report that arbitrage activity occurs between ETFs and the underlying assets. Then, we show that ETFs increase the volatility of the underlying assets, and that the prices of the underlying assets are affected by shocks to ETFs. Finally, we present findings consistent with the idea that ETFs served as a conduit for shock propagation between the futures market and the equity market during the Flash Crash on May 6, 2010. Overall, our results suggest that arbitrage activity may induce contagion.

Working Capital Management and Shareholder Wealth

We provide the first empirical study of the relationship between corporate working capital management and shareholder wealth. Examining U.S. corporations from 1990 through 2006, we find evidence that: the incremental dollar invested in net operating working capital is worth less than the incremental dollar held in cash for the average firm; the valuation of the incremental dollar invested in net operating working capital is significantly influenced by a firm’s future sales expectations, its debt load, its financial constraints, and its bankruptcy risk; and the value of the incremental dollar extended in credit to one’s customers has a greater effect on shareholder wealth than the incremental dollar invested in inventories for the average firm.

Mergers, jobs, and wages in the United States telecommunications industry

This article evaluates the human capital consequences of several mergers of local exchange companies that took place between 1988 and 2001 in the telecommunications industry of the United States. Most firms in the sector underwent one merger event while other firms underwent two events. The levels of jobs and average wages in the firms are assessed after the merger events and analysis reveals that, while the first merger events experienced by firms led to growth in employment and compensation, second merger events, which included several mega-mergers of the late 1990s and early 2000s, have led to stagnation and decline in employment levels and to negative human capital outcomes with declines in wage levels.

Governance Mechanisms and Effective Activism: Evidence from Shareholder Proposals on Poison Pills

This paper studies the interaction between governance mechanisms and the effectiveness of shareholder activism by examining shareholder-initiated proposals on poison pills. After contrasting companies along their governance regime, we observe that dictatorship firms, characterized with higher number of governance provisions, are associated with more activist voting by institutional groups: ownership by mutual funds, independent investment advisors and pension funds are significantly related to greater support of shareholder proposals against poison pills. In democratic firms, characterized with lower levels of restrictions on shareholder rights ownership by various shareholder groups is not as highly correlated with support for these proposals, suggesting perhaps that shareholders use other internal channels to voice concerns. In dictatorships, we find that certain shareholders rely on annual meetings to pressure management, and that management is less likely to take action following shareholder votes. Finally, among all institutional shareholders, management seems more likely to respond favorably in the presence of ownership by public pension funds.

Exchange Traded Funds (Etfs)

Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.

Is the efficiency doctrine valid? An evaluation of US local exchange telecommunications company mergers

Purpose – The purpose of this paper is to evaluate the impact of the various mergers of the local exchange companies in the USA.Design/methodology/approach – The authors evaluate all of the mergers that took place between 1988 and 2001 on several measures of performance for the firms that have undergone the mergers.Findings – The analysis reveals that the impacts of mergers on the several measures of efficiency that have been evaluated have all been negative.Social implications – If the efficiency motive has been primary in influencing merger approvals, then the past mergers approved have led to inefficiencies, corresponding welfare losses for the American consumer, and the mergers of communication common carriers have not been in the public interest. On the other hand, given the inefficiency outcomes, views that the quiet life, hubris and a quest for possible market power have motivated the mergers cannot be discarded.Originality/value – The results have considerable salience across industry segments and...

Do Incumbents’ Mergers Influence Entrepreneurial Entry? An Evaluation

This analysis has evaluated the impact of mergers on new entrepreneurial firm entry in the territories of firms making up the local exchange sector of the United States telecommunications industry. An analysis of first and second mergers undertaken by the local exchange companies has revealed that where mergers occurred there was significantly lower entrepreneurial entry. The results have implications for policy, since the approval of mergers has been shown to lead to lower entrepreneurial entry where mergers occur, and the approval of mergers may serve to impede entrepreneurship. Hence, greater thought should be given to merger approvals so that entrepreneurship and the process of economic growth are not compromised as a result.

Do Arbitrageurs Really Avoid High Idiosyncratic Risk Stocks

It is widely believed that stocks with high idiosyncratic risk exhibit stronger anomalies because arbitrageurs avoid holding these stocks due to diversification concerns, allowing deviations of prices from fundamental values. In this paper we test this proposition using hedge fund holding data. Controlling for stock size, we find that hedge funds allocate on average more capital towards holding high idiosyncratic stocks than they do towards low idiosyncratic risk stocks. Contrary to the prediction that diversification concerns prevent arbitrageurs from holding high idiosyncratic risk stocks, we find that the effect is stronger for small hedge funds and for less diversified hedge funds, and does not vary with hedge fund leverage. We also find that hedge fund trades in high idiosyncratic risk stocks earn significantly higher abnormal returns than trades in low idiosyncratic risk stocks. We propose that these results can be reconciled by high idiosyncratic risk being a proxy for information noise about the fundamental value. Consistent with this idea, we find that hedge funds require stronger mispricing signals from highly idiosyncratic stocks before trading.

Quest for Efficiency: Assessing the Impact of Mergers on Performance in the US Telecommunications Industry

We evaluate the impact of the various mergers of the local exchange companies that took place between 1988 and 2001 on several measures of performance of the firms that have undergone the mergers. Our analysis reveals that relative cash flows decrease after mergers, the pattern of accompanying sales growth is ambiguous and driven by increased market presence while the impact of mergers on the measures of efficiency and synergy are negative. If the efficiency motive is primary in influencing merger approval, then the past mergers approved have led to inefficiencies and welfare losses for the American consumer and the mergers of communication common carriers have not been in the public interest. On the other hand, given the inefficiency outcomes views that the quiet life, hubris and a quest for possible market power have motivated the mergers cannot be discarded.