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

58 Pages Posted: 5 Jun 2016 Last revised: 14 Jan 2020

See all articles by Panos N. Patatoukas

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Annika Yu Wang

University of Houston - Bauer College of Business

Date Written: January 13, 2020

Abstract

We use the IPO setting in conjunction with accounting measures of valuation uncertainty to provide new evidence on the role of short-sales constraints in explaining equity market mispricing. The IPOs that we predict to be most susceptible to overpricing in the immediate aftermarket have first-day returns of +44% and lockup expiration returns of -10%. Our analysis of detailed securities lending market data shows that these IPOs experience severe short-sales constraints that peak around the lockup expiration. While prior studies are inconclusive with respect to the importance of short-sales constraints for IPOs, we provide systematic evidence that the combination of high valuation uncertainty and binding short-sales constraints is key to explaining aftermarket IPO pricing.

Keywords: Short-Sales Constraints, Divergence of Opinion, IPO Pricing, IPO Share Lockups

JEL Classification: G12, G14, M41

Suggested Citation

Patatoukas, Panos N. and Sloan, Richard G. and Wang, Annika Yu, Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket (January 13, 2020). 27th Annual Conference on Financial Economics and Accounting Paper. Available at SSRN: https://ssrn.com/abstract=2789879 or http://dx.doi.org/10.2139/ssrn.2789879

Panos N. Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/site/panossom/

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Annika Yu Wang

University of Houston - Bauer College of Business

Bauer College of Business
4750 Calhoun Road
Houston, TX 77204
United States

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