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

Henk Berkman, Michael McKenzie and Patrick Verwijmeren
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Henk Berkman: University of Auckland, Australia
Michael McKenzie: University of Sydney
Patrick Verwijmeren: Erasmus University Rotterdam, Duisenberg School of Finance, The Netherlands; University of Melbourne; University of Glasgow

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Companies planning a private placement typically gauge the interest of potential 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 (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2013-10-03
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20130153

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