SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

in offer price as measured as the percentage difference of the offer price from the midpoint of the
preliminary offer price range (Change in Offer Price), and the first day trading volume as a
percent of shares offered (Volume T+0/Shares Offered). 21
Prior research in IPOs has found that trading volume and first day return are related and
significantly correlated (see Aggarwal (2002) and Krigman, Shaw and Womack (1999)).
Although not presented, we also find a high degree of correlation between short selling as a
percent of shares offered, trading volume as a percent of shares offered and first day return. The
change in offer price is not as highly correlated with the other variables but is still significantly
so. Therefore, caution must be used when including all of these variables in a regression analysis
as they may capture the same economic effect. In order to limit the effect of multi-collinearity,
each of these variables is included individually in the regressions.
Price support may also be related to the amount of short selling as it is only economically
viable for underwriters to engage in such activities if they can constrain both short and long
sales. 22 Under this scenario, if underwriters are successful in limiting the amount of selling that
occurs immediately in the aftermarket, short selling should be negatively related to price support.
Alternatively, in the absence of constraints, it is possible that price supported IPOs may attract
short sellers because, as Ellis (2006) suggests “demand for shorting is likely to be higher in
stabilized IPOs as well as IPOs with high first day returns, as investors are more likely to believe
these prices are inflated.” Thus, the predicted relation between price support and short selling is
ambiguous.
In order to determine if price support may affect the level of short selling, we define an IPO
to be price supported (Price Supported IPO) using a dummy variable equal to 1 if: a) the first
21 Our results are robust to removing short sales at the open from the total number of short sales..
22 See Hanley, Lee and Seguin (1996) for a discussion on the economics of price stabilization.
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SEC_OEA_FCIC_002465