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SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

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Short Selling in Initial Public Offerings<br />

Abstract<br />

Short sale constraints in the immediate aftermarket of IPOs are often used to explain short-term<br />

pricing anomalies that are subsequently reversed in the long-term. Using newly available data,<br />

this paper documents that short selling is an integral part of the immediate aftermarket trading of<br />

IPOs. Short selling is higher in firms with greater first day returns and revisions in offer price.<br />

We find no evidence that perceived restrictions on borrowing shares are circumvented by<br />

“naked” short selling. Failures to deliver are unrelated to short sales and are much larger than<br />

short sales in many cases. Instead, we show that failures to deliver are most likely related to<br />

price support. The level of short selling marginally predicts abnormal returns over the first three<br />

months of trading but the average short seller does not earn abnormal profits. An examination of<br />

potential market maker short sales indicates that our findings on the relation of short selling to<br />

initial returns and failures to deliver are not driven by market maker short selling activity. We<br />

conclude that short selling in IPOs is not as constrained as suggested by the literature implying<br />

that other factors may be responsible for high levels of underpricing.<br />

<strong>SEC</strong>_<strong>OEA</strong>_<strong>FCIC</strong>_002451

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