SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

day return is equal to zero or b) the IPO is in the bottom quartile of the percent of the
overallotment option exercised (as collected from Bloomberg) or c) in the top quartile for the
percent of trades, using TAQ, executed at the offer price on the first trading day. We use a
combination of the three measures because a number of IPOs may have price support even if the
first day return is not zero. 23 Aggarwal (2000), Ellis, Michaely, and O’Hara (2000), and
Lewellen (2006) find that underwriters exercise less of the overallotment option when they
engage in price support activities in the market. In addition, we expect that IPOs that have no
change in price on the offer day or more trades at the offer price, regardless of the first day
return, are more likely to have underwriter price support.
We also include two variables that control for less onerous short sale constraints. First, the
percentage float (Float) has been used in previous literature as a measure of borrowing
constraints (Ofek and Richardson (2003) and Cook, Kieschnick, and VanNess (2006)). As the
percentage float decreases, the amount of lendable shares may decline and increase the cost of
borrowing. Thus, the smaller is the public float, as measured by the ratio of shares offered to
shares outstanding from CRSP, the greater are the supposed short sale constraints. The
percentage float is the ratio of shares offered to shares outstanding from CRSP and averages 47%
in our sample.
Second, regulatory constraints such as the Uptick Rule and Nasdaq Bid Test Rule (Ability to
ExecuteT+0) could also affect the level of short selling by restricting the ability to trade on the
offer day. 24 For the Nasdaq Bid Test, we measure the percentage of the trading day when the
23 While each of these measures are correlated, they are not perfect substitutes. Our results are robust to using
alternate definitions such as IPOs who did not fully exercise the overallotment option.
24 See “Economic analysis of the short sale price restrictions under the Regulation SHO Pilot,” by the Office of
Economic Analysis for more information. The pilot report is available at
http://www.sec.gov/news/studies/2007/regshopilot020607.pdf.
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