We examine the role of hedge funds as primary lenders to corporate firms. We investigate boththe reasons and the implications of hedge funds’ activities in the primary loan market. Weexamine the characteristics of firms that borrow from hedge funds and find that borrowers areprimarily firms with lower profitability, lesser credit quality, and higher asymmetric information.Our results suggest that hedge funds serve as lenders of last resort to firms that may find itdifficult to borrow from banks or issue public debt. We also examine the effect of hedge fundlending on the borrowing firms and find that borrowers’ profitability and creditworthinessimprove subsequent to the loan. This beneficial effect of hedge fund lending is corroborated byour finding of positive abnormal returns for borrowers’ stocks around the loan announcementdate. Overall, our findings are consistent with hedge funds adding value through their lendingrelationships and financial markets perceiving these activities as good news for the firms.
