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Hole in the Wall: Informed Short Selling ahead of Private Placements

Author

Listed:
  • Henk Berkman

    (University of Auckland, Australia)

  • Michael McKenzie

    (University of Sydney)

  • Patrick Verwijmeren

    (Erasmus University Rotterdam, Duisenberg School of Finance, The Netherlands; University of Melbourne; University of Glasgow)

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 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.

Suggested Citation

  • Henk Berkman & Michael McKenzie & Patrick Verwijmeren, 2013. "Hole in the Wall: Informed Short Selling ahead of Private Placements," Tinbergen Institute Discussion Papers 13-153/IV/DSF62, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20130153
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    File URL: https://papers.tinbergen.nl/13153.pdf
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    References listed on IDEAS

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    Cited by:

    1. Li, Xiaoyang & Lin, Shannon & Tucker, Alan L., 2016. "The curious case of converts," Global Finance Journal, Elsevier, vol. 31(C), pages 1-17.

    More about this item

    Keywords

    Insider trading; Hedge funds; Private placements; Wall-crossing; Short-selling;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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