SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

overallocated position. In the case of a specialist market, frictions may exist which preclude
underwriters directly purchasing shares in the open market to cover the overallocation which
may result in more fails to deliver in specialist markets.
6. The Cost of Borrowing and Return Predictability
In this section, we further analyze the nature of short selling constraints by examining
whether borrowing costs, which we measure as direct stock loan fees, are a detriment to short
selling. For example, Ljungqvist, Nanda and Singh (2006) suggest that short selling is
constrained by the high cost of borrowing by interpreting the findings of Geczy, Musto, and
Reed (2002) as an indication “that borrowing IPO stock in the early after-market is extremely
(italics added) expensive in general, the more so, the higher was the initial day return.” In
addition, we test whether short selling is related to subsequent price movements over the first
three months of trading.
We obtain information on stock loan fees, over the first month of trading, from a dataset of
rebate rates provided by an anonymous data source. A total of 259 out of 388 IPOs (67%) have
rebate rate data available. Note that we are unable to determine whether a missing value in the
data may be due to the absence of rebate rates for all security lenders or only for our source, in
particular.
We first conduct a probit analysis to determine whether a bias may exist in the type of stocks
covered by our data. As shown in Panel A of Table 6, the differences between the IPOs that are
covered by our data source and those that are not appear to be related to the level of short selling
and the trading market. We are more likely to observe rebate rates for IPOs that have high short
selling and are traded on the NYSE or Amex.
25
SEC_OEA_FCIC_002476