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Author Figueiredo, Rui J. P. De ♦ Rawley, Evan
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Multiproduct Firm ♦ 15-10 Skill ♦ Hedge Fund ♦ Asymmetric Information ♦ New Fund ♦ Skilled Firm ♦ Excess Return Fall ♦ Hedge Fund Industry ♦ Matched Sample ♦ Focused Firm ♦ Large Sample Empirical Evidence ♦ Time Diversification Decision ♦ Influence Diversification Decision ♦ Large Panel Dataset ♦ Agency Effect ♦ Diversified Firm ♦ Basis Point ♦ Firm Capability ♦ External Investment ♦ Equilibrium Model
Abstract We propose that when managers require external investment to expand, higher skilled firms will diversify on average, even though managers can exploit asymmetric information about their ability to raise money from investors. We formalize this intuition in an equilibrium model and test our predictions using a large panel dataset on the hedge fund industry 1977-2006. We show that excess returns fall following diversification—defined as the launch of new fund—but are 11 basis points per month higher in diversified firms compared to a matched sample of focused firms. The evidence suggests that managers exploit asymmetric information about their own ability to time diversification decisions, but the discipline of markets ensures that better firms diversify on average. The results provide large sample empirical evidence that agency effects and firm capabilities both influence diversification decisions.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study