The Naked Short Puzzle, Syndicate Conflicts and IPO Underpricing

28 Pages Posted: 1 Mar 2005

See all articles by Tim Jenkinson

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Howard Jones

University of Oxford, Saïd Business School

Date Written: January 2005

Abstract

This paper provides a model to explain a puzzle connected with IPOs: why underwriters often create naked short positions - not covered by an over-allotment option - when share prices usually increase in the aftermarket, exposing them to loss. We focus on the economics of stabilization and naked short positions, and show how the lead underwriter's objectives can differ from those of the other underwriters. The disparity between the lead's share of stabilization profits and losses on the one hand and her share of selling concession on the other provides an explanation why she may have an interest in establishing a naked short even if the coverage of it is costly to the underwriters as a whole. Naked shorts, once established, incentivize the lead to price IPOs accurately. They could, if made a requirement by issuers, limit underpricing.

Keywords: IPO, naked short, syndicate conflicts

JEL Classification: G24

Suggested Citation

Jenkinson, Tim and Jones, Howard, The Naked Short Puzzle, Syndicate Conflicts and IPO Underpricing (January 2005). Available at SSRN: https://ssrn.com/abstract=676354 or http://dx.doi.org/10.2139/ssrn.676354

Tim Jenkinson (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)

HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Howard Jones

University of Oxford, Saïd Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

HOME PAGE: http://www.sbs.ox.ac.uk/research/people/Pages/HowardJones.aspx

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