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The Luckin Coffee scandal and short selling attacks

Author

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  • Peng, Zhe
  • Yang, Yahui
  • Wu, Renshui

Abstract

Luckin Coffee, extolled as the Chinese challenger to Starbucks, has been targeted by short sellers since its initial public offering. During its 13-month listing on NASDAQ, Luckin suffered at least seven short selling attacks. These attacks, although unsuccessful until Luckin’s own confession of fraud, led to Luckin’s subsequent delisting and created an adverse chain reaction in two related companies. Despite this setback, Luckin took a turn for the better in terms of revenue and survived the scandal. In this study, we examine short seller behavior in attacking Luckin and discuss why attacks can be repetitive. We find that after short sellers explicitly announce their intent, the return comovement of related companies increases. Moreover, we show that short selling is highly risky, as ill-timed attacks can cause large losses due to a short squeeze.

Suggested Citation

  • Peng, Zhe & Yang, Yahui & Wu, Renshui, 2022. "The Luckin Coffee scandal and short selling attacks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    • Handle: RePEc:eee:beexfi:v:34:y:2022:i:c:s221463502200003x
    DOI: 10.1016/j.jbef.2022.100629
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    1. Nobanee, Haitham & Ellili, Nejla Ould Daoud, 2023. "What do we know about meme stocks? A bibliometric and systematic review, current streams, developments, and directions for future research," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 589-602.

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    More about this item

    Keywords

    Financial fraud; Short seller behavior; Short selling attack; Short squeeze;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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