SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Short Selling in Initial Public Offerings
Abstract
Short sale constraints in the immediate aftermarket of IPOs are often used to explain short-term
pricing anomalies that are subsequently reversed in the long-term. Using newly available data,
this paper documents that short selling is an integral part of the immediate aftermarket trading of
IPOs. Short selling is higher in firms with greater first day returns and revisions in offer price.
We find no evidence that perceived restrictions on borrowing shares are circumvented by
“naked” short selling. Failures to deliver are unrelated to short sales and are much larger than
short sales in many cases. Instead, we show that failures to deliver are most likely related to
price support. The level of short selling marginally predicts abnormal returns over the first three
months of trading but the average short seller does not earn abnormal profits. An examination of
potential market maker short sales indicates that our findings on the relation of short selling to
initial returns and failures to deliver are not driven by market maker short selling activity. We
conclude that short selling in IPOs is not as constrained as suggested by the literature implying
that other factors may be responsible for high levels of underpricing.
SEC_OEA_FCIC_002451