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

Michael McKenzie, University of Liverpool

24th Apr 2014  11:30 am - Room 214/215, Economics and Business Building (H69)

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 wallcrossing, 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.