Short Selling and the Subsequent Performance of Initial Public Offerings

Abstract

This paper examines short sales transaction volumes on the first trading day of 610 initial public offerings (IPOs) from 2011 to 2015. The tests provide evidence of informed trading immediately at the IPO. Results reveal that short selling volume on the first trading day of the IPO is significantly negatively linked to subsequent stock returns and accounting performance. Heavily-shorted IPOs underperform lightly-shorted IPOs by a risk-adjusted average of 22.68% annualized return. Heavily-shorted IPOs have the highest probability of analyst downgrades within the first year after the IPO. Short selling is higher in hot IPOs with higher demand and higher first-day return. These stocks are overpriced at the end of the first trading day, implying that short sellers are sophisticated investors taking advantage of the overpricing. Overall, the results indicate that short sellers are important contributors to efficient stock prices.

Keywords: Short Selling, Initial public offerings, IPO performance, Analysts Recommendations

JEL Classification: G14, G12, G24, M41