Informed Short Selling around SEO Announcements

Abstract

While much of the prior research on short selling around announcements of seasoned equity offerings (SEOs) has focused on manipulation, it is unclear whether there is also informed short selling around these announcements. We test for informed short selling around SEO announcements by examining the relation between i) pre-announcement short selling and the announcement-period return and ii) changes in short interest around the SEO announcement and the long-term operating and stock price performance following the equity issue. We find that firms with large increases in short interest prior to the SEO announcement exhibit lower (i.e., more negative) announcement-period returns, and that firms with large increases in short interest around the SEO announcement experience inferior long-term operating and stock price performance following the equity issue. We also find that the negative relation between large increases in short interest and long-term operating and stock price performance is more pronounced among shelf offers. This result highlights the informational role of short sellers in identifying opportunistic market timers of equity issues among shelf filers. Our overall results indicate the presence of informed short selling around SEO announcements.