Journal article
Hole in the wall: Informed short selling ahead of private placements
H Berkman, MD McKenzie, P Verwijmeren
Review of Finance | OXFORD UNIV PRESS | Published : 2017
DOI: 10.1093/rof/rfw036
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.
Grants
Funding Acknowledgements
We thank an anonymous referee, Sjoerd van Bekkum, Dion Bongaerts, Howard Chan, Carole Comerton-Forde, Marie Dutordoir, Robert Faff, Neal Galpin, Ning Gong, Bruce Grundy, Abe de Jong, Craig Lewis, Chris Malloy, Nadia Massoud, Lyndon Moore, Marieke van der Poel, Donald Stokes, Xiao Xiao, David Yermack, Marius Ziegan, Eric Zitzewitz and seminar participants at the University of Melbourne, Deakin University, Erasmus University Rotterdam, University of Otago, Manchester Business School, Monash University, Luxembourg School of Finance, the British Accounting and Finance Association Meetings, the LaTrobe Business School Research Symposium and the four Nations Cup 2014 for useful comments. Verwijmeren thanks NWO for financial support through a Vidi grant.