Price Stabilization, Short Selling, and IPO Secondary Market Liquidity

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