Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket

Abstract

We use the IPO setting to provide evidence that accounting measures of valuation uncertainty combine with short-sales constraints to generate significant equity market mispricing. The IPOs that we predict to be most susceptible to overpricing in the immediate aftermarket have first-day returns of +47% and lockup expiration returns of -9%. Our detailed analysis of securities lending market data confirms that these IPOs experience severe short-sales constraints that peak around the lockup expiration. Our paper both explains the anomalous pricing of IPOs and highlights the importance of valuation uncertainty and short-sales constraints in explaining equity mispricing.

Keywords: Short-Sales Constraints, Valuation Uncertainty, IPO Pricing, Equity Mispricing

JEL Classification: G12, G14, M41