Are hedge funds guilty of manipulative short‐selling?
Abstract
Purpose
The purpose of this paper is to investigate short‐selling around private investment in public equity (PIPE) issuances, for evidence of manipulative short‐selling by hedge funds.
Design/methodology/approach
The authors use the Regulation SHO short‐selling data in combination with information about hedge fund participation in traditional stock PIPE offerings from Sagient Research, and share price and trading volume data from the Center for Research in Security Prices (CRSP) to examine the relations among hedge fund participation, short‐selling levels and stock returns surrounding such offerings.
Findings
It is found that significantly less pre‐deal short‐selling occurs when hedge funds are included in the PIPE investor group, and adjusted returns for firms with hedge funds as investors are positive in the pre‐deal period and negative in the post‐deal period. Both of these findings are opposite of the patterns expected given manipulative short‐selling by hedge funds. Pre‐deal and post‐deal adjusted returns and PIPE discount are unrelated to pre‐deal short‐selling by hedge funds, findings inconsistent with manipulative short‐selling by these investors. The evidence suggests that most hedge funds that invest in traditional stock PIPEs do not engage in manipulative short‐selling around these deals.
Originality/value
This paper is the first, to the authors' knowledge, to examine hedge fund participation and daily short‐selling around traditional stock PIPE issuances. Previous studies focus on structured PIPE deals, which do not represent the majority of the PIPE market at present. The daily short selling data used in this study allow for detailed investigation of market behavior not afforded by monthly short interest data used in previous studies.
Keywords
Citation
Stephen Haggard, K., Qing Hao, (G). and Jenny Zhang, Y. (2012), "Are hedge funds guilty of manipulative short‐selling?", Managerial Finance, Vol. 38 No. 11, pp. 1048-1066. https://doi.org/10.1108/03074351211266784
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited