Hole in the wall: informed short selling ahead of private placements

Berkman, H., McKenzie, M. D. and Verwijmeren, P. (2017) Hole in the wall: informed short selling ahead of private placements. Review of Finance, 21(3), pp. 1047-1091. (doi: 10.1093/rof/rfw036)

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 evidence of widespread 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. We also observe pre-announcement trading in the options market.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Verwijmeren, Professor Patrick
• Authors: Berkman, H., McKenzie, M. D., and Verwijmeren, P.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Review of Finance
• Publisher: Oxford University Press
• ISSN: 1572-3097
• ISSN (Online): 1573-692X
• Published Online: 27 July 2016
• Copyright Holders: Copyright © 2016 Oxford University Press
• First Published: First published in Review of Finance 21(3):1047-1091
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher