Short Selling Before Initial Public Offerings

38 Pages Posted: 27 Jun 2015 Last revised: 21 Mar 2017

See all articles by Linquan Chen

Linquan Chen

University of Exeter

Alok Kumar

University of Miami - School of Business Administration

Chendi Zhang

University of Warwick - Finance Group

Date Written: September 12, 2016

Abstract

This paper shows that the presence of security lending supply before an initial public offering (IPO) reduces the initial stock return following IPO and improves subsequent long-run performance. We use a sample of British firms that go public via a two-stage IPO procedure where a firm becomes publicly traded on the London Stock Exchange in the first stage, and offers new shares to the public in the second stage. Stocks are lendable before the new equity issuance which relaxes the short-sale constraints that investors typically face in a conventional IPO. We find that two-stage offerings with higher security lending supply before offering are associated with lower IPO underpricing and better long-run performance. Our results are consistent with the conjecture that short selling improves the pricing efficiency of the IPO market.

Keywords: IPO underpricing; two-stage offering; short selling; IPO long-run performance

JEL Classification: G14, G31, G38

Suggested Citation

Chen, Linquan and Kumar, Alok and Zhang, Chendi, Short Selling Before Initial Public Offerings (September 12, 2016). WBS Finance Group Research Paper Series. Available at SSRN: https://ssrn.com/abstract=2623110 or http://dx.doi.org/10.2139/ssrn.2623110

Linquan Chen

University of Exeter ( email )

Streatham Court
Exeter, EX4 4ST
United Kingdom
7749606688 (Phone)
7749606688 (Fax)

Alok Kumar

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Chendi Zhang (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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