Hole in the Wall: Informed Short Selling Ahead of Private Placements. (27th July 2016)

• Record Type: Journal Article
• Authors: Berkman, Henk; McKenzie, Michael D.; Verwijmeren, Patrick
• Is Part Of: Review of finance. Volume 21:Number 3(2017)
• Page Start: 1047
• Page End: 1091
• Publication Date: 2016-07-27
• Subjects: G14 -- G32; Insider trading -- Hedge funds -- Private placements -- Wall-crossing -- Short selling; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfw036
• Languages: English
• ISSNs: 1572-3097

Abstract

Abstract: Companies planning a private placement typically gauge the interest of potential buyers before the offering is publicly announced. Regulators are concerned with this practice, called wall-crossing, as it might invite insider trading, especially when the potential investors are hedge funds. We examine privately placed common stock and convertible offerings and find evidence of widespread pre-announcement short selling. We show that pre-announcement short sellers are able to predict announcement day returns. The effects are especially strong when hedge funds are involved and when the number of buyers is high. We also observe pre-announcement trading in the options market.