Market Manipulation around Seasoned Equity Offerings: Evidence Prior to the Global Financial Crisis of 2007–2009

Charlie Charoenwong, David Ding and Ping Wang
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Charlie Charoenwong: Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore
Ping Wang: Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore

IJFS, 2022, vol. 10, issue 2, 1-27

Abstract: Since the adoption of the SEC’s Rule 10b-21 in 1988, many researchers have been concerned over the effectiveness of short sales constraints in preventing manipulative trading in the derivatives market. We analyze whether options can be used as synthetic short sale instruments to manipulate stock prices before a seasoned equity offer. Due to the existence of strict short sales constraints in the equity market and market makers’ anticipation of manipulative trading, it would be very costly for a manipulator to drive stock prices down artificially either by short selling in the equity market or by using synthetic short sales in the options market. Using a sample of 237 firms that issued SEOs on the NYSE and had options listed on any U.S. options exchange from April 2002 to December 2004, we show that potential manipulators in the options market tend to use put options as a trading vehicle during the SEO’s pre-offer period. The results of our empirical tests support the predictions of our model.

Keywords: market manipulation; options market; seasoned equity offering; SEC Rule 10b-21 (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2022
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