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Are hedge funds guilty of manipulative short-selling?


  • K. Stephen Haggard
  • (Grace) Qing Hao
  • Ying Jenny Zhang


Purpose - The purpose of this paper is to investigate short-selling around private investment in public equity (PIPE) issuances, for evidence of manipulative short-selling by hedge funds. Design/methodology/approach - The authors use the Regulation SHO short-selling data in combination with information about hedge fund participation in traditional stock PIPE offerings from Sagient Research, and share price and trading volume data from the Center for Research in Security Prices (CRSP) to examine the relations among hedge fund participation, short-selling levels and stock returns surrounding such offerings. Findings - It is found that significantly less pre-deal short-selling occurs when hedge funds are included in the PIPE investor group, and adjusted returns for firms with hedge funds as investors are positive in the pre-deal period and negative in the post-deal period. Both of these findings are opposite of the patterns expected given manipulative short-selling by hedge funds. Pre-deal and post-deal adjusted returns and PIPE discount are unrelated to pre-deal short-selling by hedge funds, findings inconsistent with manipulative short-selling by these investors. The evidence suggests that most hedge funds that invest in traditional stock PIPEs do not engage in manipulative short-selling around these deals. Originality/value - This paper is the first, to the authors' knowledge, to examine hedge fund participation and daily short-selling around traditional stock PIPE issuances. Previous studies focus on structured PIPE deals, which do not represent the majority of the PIPE market at present. The daily short selling data used in this study allow for detailed investigation of market behavior not afforded by monthly short interest data used in previous studies.

Suggested Citation

  • K. Stephen Haggard & (Grace) Qing Hao & Ying Jenny Zhang, 2012. "Are hedge funds guilty of manipulative short-selling?," Managerial Finance, Emerald Group Publishing, vol. 38(11), pages 1048-1066, September.
  • Handle: RePEc:eme:mfipps:v:38:y:2012:i:11:p:1048-1066

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    References listed on IDEAS

    1. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
    2. Fung, William & Hsieh, David A., 2000. "Measuring the market impact of hedge funds," Journal of Empirical Finance, Elsevier, vol. 7(1), pages 1-36, May.
    3. Gerard, Bruno & Nanda, Vikram, 1993. " Trading and Manipulation around Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 48(1), pages 213-245, March.
    4. Fung, William & Hsieh, David A., 2011. "The risk in hedge fund strategies: Theory and evidence from long/short equity hedge funds," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 547-569, September.
    5. Hillion, Pierre & Vermaelen, Theo, 2004. "Death spiral convertibles," Journal of Financial Economics, Elsevier, vol. 71(2), pages 381-415, February.
    6. Arnaud Cave, 2012. "The market timing skills of hedge funds during the financial crisis," Managerial Finance, Emerald Group Publishing, vol. 38(1), pages 4-26, February.
    7. David J. Brophy & Paige P. Ouimet & Clemens Sialm, 2009. "Hedge Funds as Investors of Last Resort?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 541-574, February.
    8. Chen, Hsuan-Chi & Dai, Na & Schatzberg, John D., 2010. "The choice of equity selling mechanisms: PIPEs versus SEOs," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 104-119, February.
    9. Tyler R. Henry & Jennifer L. Koski, 2010. "Short Selling Around Seasoned Equity Offerings," Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4389-4418, December.
    10. Massoud, Nadia & Nandy, Debarshi & Saunders, Anthony & Song, Keke, 2011. "Do hedge funds trade on private information? Evidence from syndicated lending and short-selling," Journal of Financial Economics, Elsevier, vol. 99(3), pages 477-499, March.
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    Cited by:

    1. Hao, (Grace) Qing, 2016. "Is there information leakage prior to share repurchase announcements? Evidence from daily options trading," Journal of Financial Markets, Elsevier, vol. 27(C), pages 79-101.


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