SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

negative and occasionally significant coefficient on percentage float is counter to the use of this
variable as a measure of short sale constraints. The result on the ability to execute short sales
suggests that price test restrictions are not a significant deterrent to short selling.
Consistent with recent literature (Alexander and Peterson (2006), Diether, Lee, and Werner
(2007a), and Diether, Lee, and Werner (2007b)), the coefficient on the Nasdaq dummy is highly
significant and positive. This finding indicates that IPOs on non-specialist markets have higher
short selling than IPOs on specialist markets. It is not clear, however, whether this is related to
the structure and regulation of the market or the types of companies that choose to go public on
the NYSE/Amex or Nasdaq (Corwin and Harris (2001)).
Collectively, our findings suggest that IPOs that are more underpriced have greater short
selling than other IPOs. Although Miller (1977) and others argue that informed investors may be
precluded from taking advantage of divergence of opinion because of short sale constraints, our
results indicate that at least some investors are able to engage in short selling.
5. Are Short Sellers in IPOs Engaged In Naked Short Selling?
The observed high level of short selling, coupled with the presumed difficulty in borrowing
shares and the potentially high cost of lending (Ljungqvist, Nanda and Singh (2006)), begs the
question of whether short sellers avoid those constraints by engaging in naked short selling.
According to the SEC web site, “a “naked” short sale is a short sale where the seller does not
borrow or arrange to borrow the securities in time to make delivery to the buyer within the
standard three-day settlement period [and, as] a result, the short seller fails to deliver securities to
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SEC_OEA_FCIC_002469