Price Stabilization, Short Selling, and IPO Secondary Market Liquidity

48 Pages Posted: 1 Oct 2019

Date Written: September 10, 2019

Abstract

Prior research shows that failures to deliver, which commonly occur around initial public offerings (IPOs), typically result from underwriter price stabilization. Additionally, investors often establish short positions in IPO stocks that are unrelated to underwriter price stabilization. We study the relation between failures to deliver, short sales, and IPO trading costs. We find that failures to deliver are associated with greater liquidity, especially for IPOs likely to receive underwriter price support. However, contrary to prior research that finds that short selling is associated with greater liquidity, we find that short selling is negatively correlated with liquidity for IPO stocks with strong investor demand.

Keywords: bid-ask spreads, initial public offering (IPO), failure to deliver, short selling, trading costs

JEL Classification: G14, G24

Suggested Citation

Boulton, Thomas Jason and Braga-Alves, Marcus V., Price Stabilization, Short Selling, and IPO Secondary Market Liquidity (September 10, 2019). Quarterly Review of Economics and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3456589

Thomas Jason Boulton (Contact Author)

Miami University ( email )

3028 Farmer School of Business
Oxford, OH 45056
United States
(513) 529-1563 (Phone)
(513) 529-8598 (Fax)

Marcus V. Braga-Alves

Pace University ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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