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

56 Pages Posted: 16 Mar 2013 Last revised: 7 Aug 2014

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Michael D. McKenzie

The University of Sydney - Discipline of Finance; University of Cambridge - Cambridge Endowment for Research in Finance (CERF); Financial Research Network (FIRN)

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: August 7, 2014

Abstract

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

Berkman, Henk and McKenzie, Michael David and Verwijmeren, Patrick, Hole in the Wall: Informed Short Selling Ahead of Private Placements (August 7, 2014). Available at SSRN: https://ssrn.com/abstract=2233757 or http://dx.doi.org/10.2139/ssrn.2233757

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Michael David McKenzie

The University of Sydney - Discipline of Finance ( email )

Level 2 9 Castlereagh Street
Sydney, NSW 2000
Australia
+61 2 9114 0578 (Phone)
+61 2 9351 6461 (Fax)

University of Cambridge - Cambridge Endowment for Research in Finance (CERF) ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Patrick Verwijmeren (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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