SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

In focusing on the potential short selling profits, the results indicate that those who sold short
the IPOs in the lowest two quartiles profited from the short selling. However, the average
potential short selling profits are negative even before adjusting for lending fees, revealing
several interesting implications. First, short sellers are not so informed that they can profit
without risk. Once lending fees are considered, only 34% of the IPOs with rebate rate data have
profits greater than zero (not shown). Second, as in Mitchell, Pulvino, and Stafford (2002), the
risk of upward price movements may be a bigger deterrent to additional short selling in IPOs
than other short selling constraints.
Table 8 provides further evidence on the return predictability of short selling over the first
month and the first three months of trading. Prior studies on short selling, for example, Diether,
Lee and Werner (2007a) and Boehmer, Jones, and Zhang (2008), find that the level of short sales
is negatively related to subsequent returns. As our dependent variable, we calculate buy-and-
hold returns adjusted for the Nasdaq Composite Index over three different time periods: the offer
day intraday return from the open to the close, the one month return from the close of the offer
day to the end of the first month and the return over the first three months of trading. We adjust
standard errors for clustering by month of the IPO.
In Panel A, we find no evidence that the level of short selling is related to the intraday return
on the offer day. Although short sellers are attracted to IPOs that open at a high return, the level
of short selling is not related to changes in the price after trading begins. The only independent
variable that is related to intraday returns is the price support dummy variable, which is negative
as expected.
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SEC_OEA_FCIC_002479