Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket
59 Pages Posted: 5 Jun 2016 Last revised: 11 Feb 2020
Date Written: February 10, 2020
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: Suggested Citation