# 13-153/IV/DSF62 (2013-10-03)

Author(s)
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
Keywords:
Insider trading, Hedge funds, Private placements, Wall-crossing, Short-selling
JEL codes:
G32

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.