Short Selling in Initial Public Offerings

Abstract

Short sale constraints in the aftermarket of initial public offerings (IPOs) are often used to explain short-term underpricing that is subsequently reversed. This paper shows that short selling is integral to the aftermarket and is higher in IPOs with greater underpricing. Perceived restrictions on borrowing shares are not systematically circumvented by “naked” short selling. Short sellers, on average, do not appear to earn abnormal profits in the near term and our findings are not driven by market makers. Short selling in IPOs is not as constrained as suggested by the literature, implying that other factors may be responsible for underpricing.

Keywords: IPO, short selling, underpricing, price support, short covering, naked short sale, failures to deliver, price stabilization

JEL Classification: G14, G24, G28, G32