Hole in the Wall: Informed Short Selling Ahead of Private Placements
56 Pages Posted: 16 Mar 2013 Last revised: 7 Aug 2014
Date Written: August 7, 2014
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.
Keywords: Insider trading, Hedge funds, Private placements, Wall-crossing, Short-selling
JEL Classification: G32
Suggested Citation: Suggested Citation