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The Luckin Coffee scandal and short selling attacks

Zhe Peng, Yahui Yang and Renshui Wu

Journal of Behavioral and Experimental Finance, 2022, vol. 34, issue C

Abstract: Luckin Coffee, extolled as the Chinese challenger to Starbucks, has been targeted by short sellers since its initial public offering. During its 13-month listing on NASDAQ, Luckin suffered at least seven short selling attacks. These attacks, although unsuccessful until Luckin’s own confession of fraud, led to Luckin’s subsequent delisting and created an adverse chain reaction in two related companies. Despite this setback, Luckin took a turn for the better in terms of revenue and survived the scandal. In this study, we examine short seller behavior in attacking Luckin and discuss why attacks can be repetitive. We find that after short sellers explicitly announce their intent, the return comovement of related companies increases. Moreover, we show that short selling is highly risky, as ill-timed attacks can cause large losses due to a short squeeze.

Keywords: Financial fraud; Short seller behavior; Short selling attack; Short squeeze (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jbef.2022.100629

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Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and Jürgen Huber

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