Short Selling Around Seasoned Equity Offerings

Abstract

This paper uses daily short selling data to examine whether short selling around seasoned equity offerings (SEOs) reflects informed or manipulative trading strategies. We find no evidence of informed short selling around SEO announcements. Around issue dates, higher levels of pre-issue short selling are significantly related to larger issue discounts, consistent with manipulative trading. These results are significant only for the non-shelf registered offerings in our sample. We also directly test the effectiveness of SEC Rule 105, and find that it constrains some but not all manipulative trading. This research makes three main contributions to the literature. We are the first paper since the SEC implemented rules restricting such behavior to provide direct evidence that pre-issue short selling is associated with larger SEO discounts. Previous research using monthly short interest data rejects the manipulative trading hypothesis. Our results differ from prior research primarily because daily short selling data allow much more powerful tests. Second, our evidence that there is no manipulation around shelf offerings provides one possible explanation for the increased popularity of shelf registrations. Finally, although short selling usually enhances price efficiency, we document a situation where short selling makes prices less efficient.

Keywords: Seasoned equity offerings, short sales, Rule 10b-21, Regulation SHO, Rule 105, Informed Trading, Manipulation

JEL Classification: G14, G32, G38