Vyacheslav Fos

Inferring Reporting-Related Biases in Hedge Fund Databases from Hedge Fund Equity Holdings

This paper formally analyzes the biases related to self-reporting in hedge fund databases by matching the quarterly equity holdings of a complete list of 13F-filing hedge fund companies to the union of five major commercial databases of self-reporting hedge funds between 1980 and 2008. We find that funds initiate self-reporting after positive abnormal returns that do not persist into the reporting period. Termination of self-reporting is followed by both return deterioration and outflows from the funds. The propensity to self-report is consistent with the trade-offs between the benefits (e.g., access to prospective investors) and costs (e.g., partial loss of trading secrecy and flexibility in selective marketing). Finally, returns of self-reporting funds are higher than that of nonreporting funds using characteristic-based benchmarks. However, the difference is not significant using alternative choices of performance measures. This paper was accepted by Brad Barber, finance.

The Disciplinary Effects of Proxy Contests

Using a manually collected data set of all proxy contests from 1994 through 2012, I show that proxy contests play an important role in hostile corporate governance. Target shareholders benefit from proxy contests: the average abnormal returns reach 6.5% around proxy contest announcements. Proxy contests that address firms’ business strategies and undervaluation are most beneficial for shareholders. By contrast, proxy contests that aim at changing capital structure and governance do not lead to higher firm values. Relative to matching firms, future targets are smaller, they have higher stock liquidity, higher institutional and activist ownership, lower leverage and market valuation, and higher investments. Whereas most of these characteristics predict proxy contests in time series, prior to proxy contests, targets also experience poor stock performance, decreases in investments, increases in cash reserves and payouts to shareholders, and increases in management’s entrenchment. These changes in corporate po...

Public Short Selling by Activist Hedge Funds

Using a hand-collected sample of 280 public short selling campaigns, we show that voluntary disclosure of short positions by activist hedge funds has increased significantly in the last decade. Targets of short campaigns experience abnormal returns of approximately -7% around the announcement date. Campaigns are also associated with changes in the behavior of other stakeholders (e.g., litigation) that potentially harm targets. Both changes in targets’ valuations and stakeholder behavior are not explained by changes in short interest, suggesting that public short campaigns differ from non-public short sales. We consider two economic mechanisms that potentially explain this behavior: information acquisition synergies and the ability to engage in “short investor activism.” Finally, we undertake a joint analysis of activists’ long and short positions and find that their aggregate effect on the shareholders of targets is indistinguishable from zero. The results highlight the tension between the contribution of activist hedge funds to economic and price efficiency and their effects on targets’ shareholders. The last two decades have seen a dramatic increase in the prominence and influence of activist hedge funds. The rise of activists, however, has not been without controversy. While research broadly indicates that, on average, hedge fund activism is followed by improved firm outcomes (Brav, Jiang, Partnoy, and Thomas, 2008; Bebchuk, Brav, and Jiang, 2015), some counter that campaigns often have myopic goals. Martin Lipton, for example, argues that activism promotes “short-termism” and may lead to “...very serious adverse effects on the companies, their long-term shareholders, and the American economy.” Although the debate regarding activists centers on their long positions, recent years have seen a new phenomenon: high-profile public short selling campaigns by activist hedge funds. David Einhorn’s short of Allied Capital, a publicly traded mezzanine financing firm, provides an illustrative example. In May of 2002, Einhorn announced his short position in Allied at an investment conference, arguing the firm engaged in questionable accounting practices. Allied’s stock dropped over 10% the following day, and by the next month its short interest had increased six-fold. The SEC eventually launched an investigation into Allied that “zero[ed] in on many of the criticisms made by short-sellers.” While the finance literature broadly finds that (at least some) short sellers are informed (e.g., Boehmer, Jones, and Zhang, 2008; Engelberg, Reed, and Ringgenberg, 2012; Cohen, Diether, and Malloy, 2007), these investors have historically avoided public disclosure of their positions. One reason for this behavior is that such disclosures may lead to accusations of wrongdoing by managers of firms or other parties. For example, in 2006, Biovail sued SAC Capital for libel, accusing the hedge fund of conspiring to drive down its share price. Public disclosure of short positions can also invite regulatory scrutiny. For example, both the Manhattan U.S. attorney’s office and the FBI investigated potential See: https://corpgov.law.harvard.edu/2013/10/28/empiricism-and-experience-activism-and-shorttermism-the-real-world-of-business/. See “SEC Is Investigating Allied Capital,” The Wall Street Journal (6/24/2004) See “Judge Dismisses Biovail’s Suit Against Hedge Fund,” The New York Times (8/20/2009)

Informed Trading in the Stock Market and Option Price Discovery

Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we show that both directional and volatility information is reflected in stock and option prices. Option prices reflect the adverse selection risk associated with the volatility component of private information rather than the directional component. We then study the role of informed trading in price discovery and find that activists choose to trade stocks and to not trade derivatives in about 98% of cases. When they use derivatives, they typically seek to increase their overall economic exposure to the stock. We find that on days when activists accumulate shares, option implied volatility decreases and volatility skew increases. We conclude that informed trading in the stock market contributes to the flow of volatility information into option prices.

Debt and Human Capital: Evidence from Student Loans

This paper investigates the effects of college tuition on student debt and human capital accumulation. We exploit data from a random sample of undergraduate students in the United States and implement a research design that instruments for tuition with relatively large changes to the tuition of students who enrolled at the same school in different cohorts. We �?nd that

Do Prices Reveal the Presence of Informed Trading

10,000 in higher tuition causally reduces the probability of graduating with a graduate degree by 6.2 percentage points and increases student debt by

Shareholder Democracy in Play: Career Consequences of Proxy Contests

2,961. Higher tuition also reduces the probability of obtaining an undergraduate degree among poorer, credit-constrained students. Thus, the relatively large increases in the price of education in the United States in the past decade can affect the accumulation of human capital.