The rise before the close: Underwriter trading around SEOs

We examine the pervasiveness of underwriter price manipulation of rights offerings during the offer period. Underwriters have an economic incentive to manipulate the stock price above the offer price leading up to the closing date of rights offerings to increase shareholder take-up rates and minimize the shortfall they are obligated to acquire. We find that underwritten rights offerings trading just below the offer price in the last five days prior to the closing date experience significantly higher abnormal trading volumes and returns. Using data for individual brokers’ transactions, we show that underwriting brokers engage in abnormal buying of shares trading just below the offer price, leading to significant price impact and increasing the profitability of underwriting activities.