Alternative modes of financing: hedge fund activism and crowdfunding
Εναλλακτικές μορφές χρηματοδότησης: ακτιβισμός από εταιρίες αντιστάθμισης κινδύνου και συμμετοχική χρηματοδότηση
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Keywords
Hedge Fund activism ; Schedule13D ; Voice ; Abnormal returns ; Information asymmetry ; Crowdfunding ; Peer-to-peer lending ; Risks and motivations ; Cross-borderAbstract
Financial markets have always being driven by differences in how much people know. If markets were perfectly efficient, people would have no incentive to spend money or time to gather information on financial assets because it would have been directly reflected on prices. Therefore, investors search for information which would offer them an investing advantage and higher returns. On the other hand, regulators try to identify and eliminate the implications of asymmetric information on financial markets.
This thesis is comprised of two separate essays which examine different investment strategies based on different investment decision making processes. The first essay concentrates on strategies driven by professional and sophisticated investors such as hedge funds. In particular, we examine activist interventions and compare active to passive strategies both in the short and long-term. We then create a sample of active filings only and split the sample to voice and non-voice based on specific plans or proposals revealed publicly by the hedge fund during intervention. We specify the days before, on and after critical dates which will be explored in detail. Based on our results, retail investors could imitate hedge fund strategies to gain profits either in the short-term or the long-term. This essay finds that hedge funds create value around critical dates and provides evidence that there are at least two dates, the “required date” and the “voice date”, that lead to positive short-term abnormal returns other than the initial filing. However, although activism generates long-term value, there is no evidence that voice generates long-term abnormal returns.
Overall, we provide evidence that the U.S. stock market responds favorably, in the short-term, on critical dates other than the filing date for active filings. However, an information leak takes place prior to the initial filing where information is not publicly available. The latter generates the need for a more strict disclosure regulation by the SEC especially for active filings in order to avoid market manipulation.
The second essay focuses on retail investors and their decision process to participate in high-risk investments. In particular, we focus on peer-to-peer lending crowdfunding, a rapidly developing alternative financing instrument emerging in the European Union. We used a questionnaire in order to examine the users’ perceptions of motivations and risks in peer-to-peer lending and how these are related to cross-border activity. The majority of peer-to-peer transactions take place in the United Kingdom where crowdfunding is regulated by the Financial Conduct Authority (FCA). We therefore split our sample to UK and non-UK respondents. The key finding from this essay is that UK respondents are driven by higher returns and less by interest for the project. Another important finding is that all risks score lower in the case of the UK respondents, a strong indication of higher levels of trust on the entire industry in the UK. On cross-border activity, it seems that cross-border investments are associated with investing in a foreign platform rather than investing in a foreign project in a domestic platform. Another interesting finding is that non-UK respondents are more likely to invest abroad when compared with UK respondents showing the need for financing more robust and interesting projects.
The rise of alternative financing during the financial crisis offered market participants a variety of investment opportunities. However, the lack of a unique pan-European framework puts constraints on further development. Our results denote the need of a well-designed regulation around the European Union, which would support confidence among participants and minimize market abuses, misconduct and mismanagement within the industry.