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Market Manipulation around Seasoned Equity Offerings: Evidence Prior to the Global Financial Crisis of 2007–2009

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  • Charlie Charoenwong

    (Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore)

  • David K. Ding

    (Lee Kong Chian School of Business, Singapore Management University, Singapore 178899, Singapore)

  • Ping Wang

    (Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore)

Abstract

Since the adoption of the SEC’s Rule 10b-21 in 1988, many researchers have been concerned over the effectiveness of short sales constraints in preventing manipulative trading in the derivatives market. We analyze whether options can be used as synthetic short sale instruments to manipulate stock prices before a seasoned equity offer. Due to the existence of strict short sales constraints in the equity market and market makers’ anticipation of manipulative trading, it would be very costly for a manipulator to drive stock prices down artificially either by short selling in the equity market or by using synthetic short sales in the options market. Using a sample of 237 firms that issued SEOs on the NYSE and had options listed on any U.S. options exchange from April 2002 to December 2004, we show that potential manipulators in the options market tend to use put options as a trading vehicle during the SEO’s pre-offer period. The results of our empirical tests support the predictions of our model.

Suggested Citation

  • Charlie Charoenwong & David K. Ding & Ping Wang, 2022. "Market Manipulation around Seasoned Equity Offerings: Evidence Prior to the Global Financial Crisis of 2007–2009," IJFS, MDPI, vol. 10(2), pages 1-27, May.
    • Handle: RePEc:gam:jijfss:v:10:y:2022:i:2:p:33-:d:813996
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    References listed on IDEAS

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    1. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, vol. 74(2), pages 305-342, November.
    2. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    3. Mayhew, Stewart & Sarin, Atulya & Shastri, Kuldeep, 1995. "The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements," Journal of Finance, American Finance Association, vol. 50(5), pages 1635-1653, December.
    4. Danielsen, Bartley R. & Sorescu, Sorin M., 2001. "Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(4), pages 451-484, December.
    5. Safieddine, Assem & Wilhelm, William J, Jr, 1996. "An Empirical Investigation of Short-Selling Activity Prior to Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 51(2), pages 729-749, June.
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