Abstract
We document negative abnormal returns and abnormally high short selling in the trading days immediately before the private placements of U.S. convertible bonds. Issues experiencing greater post-placement short selling have more intense pre-placement short selling. In contrast, there are no pre-placement negative abnormal returns and less pre-placement abnormal short selling for issuers who also engage in share repurchases. Pre-placement findings are related to specific terms of the converts and related buybacks. While other potential explanations exist, the overall weight of the evidence suggests that the most plausible explanation is front-running.
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