Hole in the Wall: A Study of Short Selling and Private Placements
March 30, 2013 Leave a comment
Hole in the Wall: A Study of Short Selling and Private Placements
Henk Berkman University of Auckland – Faculty of Business & Economics
Michael D. McKenzie University of Sydney – Discipline of Finance; University of Cambridge – Cambridge Endowment for Research in Finance (CERF); Financial Research Network (FIRN)
Patrick Verwijmeren Erasmus University Rotterdam (EUR) – Erasmus School of Economics (ESE)
March 23, 2013
Abstract:
Companies planning a private placement typically gauge the interest of institutional 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 widespread evidence of 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.