Publication Type

Journal Article

Version

publishedVersion

Publication Date

5-2022

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.

Keywords

market manipulation, options market, seasoned equity offering, SEC Rule 10b-21

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

International Journal of Financial Studies

Volume

10

Issue

2

First Page

1

Last Page

27

ISSN

2227-7072

Identifier

10.3390/ijfs10020033

Publisher

MDPI

Copyright Owner and License

Authors-CC-BY

Additional URL

https://doi.org/10.3390/ijfs10020033

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