SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Panel B of Table 6 presents the determinants of the cost of borrowing. For the IPOs for
which data is available, the daily loan fee is calculated as the annualized federal funds rate minus
the rebate rate. We then calculate the weighted average loan fee over the first month of trading
(T+3 to T+24) using the number of shares in our vendor’s data. The average level of the loan fee
in our sample is just slightly lower than Geczy, Musto and Reed (2002) most likely due to the
weighted averaging of the loan fees over the first trading month. The fact that our rebate rates
are within the range documented in Geczy, Musto and Reed (2002) is surprising given that our
sample exhibits much lower first day returns than their sample, which is within the bubble
period.
If the expected cost of borrowing deters short sellers from entering the market on T+0, then
the relationship between the level of short selling on the offer day and loan fees should be
negative. On the contrary, we find that higher loan fees are related to higher, not lower, levels of
short selling and our results provide additional insight into the Geczy, Musto, and Reed (2002)
finding that loan fees are greatest for IPOs with high first day returns. We show that the high
level of short selling on the first trading day is a good predictor of the level of loan fees and
interpret these results as an indication that loan fees appear not to be an impediment to short
selling in IPOs but are likely determined, in part, by the level of short selling.
Although Geczy, Musto and Reed (2002) document a significant relation between loan fees
and IPOs that have zero or negative returns, we find only weak evidence that potential price
support is related to the loan fee. For the sample of IPOs studied here, the lack of consistent
relation between loan fees and price support is consistent with the insignificant relation between
price support and short selling. Interestingly, we find a significant relation between failures to
deliver and loan fees even though the level of failures to deliver and short selling are unrelated.
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SEC_OEA_FCIC_002477