SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

In Panel B, failures to deliver are unaffected by either potential market making activity or
other short sales. This confirms our finding that failures to deliver in IPOs are not due to
“naked” short sales, even those of market makers.
Finally, in Panel C, the exclusion of potential market maker short selling on the first
trading day results in weak positive statistical significance on the relation between short selling
and future short-term returns. Although not shown, there is still no relation between either
market maker short selling or other short selling and the three month profitability. Overall, the
results of Table 9 indicate that our findings are not attributable to market making activity but to
short selling by others.
8. Summary and Conclusions
Using short sale transactions data recently made publicly available, we explore the nature of
short selling in initial public offerings. Many academic papers rely on the assumption that short
selling is constrained early in the IPO process and that such constraints contribute to the high
level of underpricing of some IPOs. In contrast, we find that short selling is prevalent on the
initial trading day and many short sales occur close to the open.
Tests of whether short selling is related to divergence of opinion (Miller (1977), Derrien
(2006), Cornelli, Goldreich and Ljungqvist (2006) and Ljungqvist, Nanda and Singh (2006))
indicate that short selling is increasing in the level of the first day return. While our results are
consistent with the hypothesis that short sellers are attracted to IPOs with more divergence of
opinion and hence, higher first day returns, they are inconsistent with the notion that short selling
constraints are the reason for high underpricing.
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