Short selling in initial public offerings☆

Edwards, Amy K.; Hanley, Kathleen Weiss

doi:10.1016/j.jfineco.2010.03.010

Cited by 94 publications

(45 citation statements)

References 48 publications

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“…Figlewski and Webb (1993, p. 762) explain that the higher short selling interests show Bthe amount of adverse information that was excluded from the market price^. Contrary to the generally held beliefs that short selling is constrained on first trading day of IPOs due to higher borrowing costs and restricted availability of shares for shorting, Edwards and Hanley (2010) show significant short selling in IPO shares on the first trading day. They find positive relation between underpricing, borrowing cost and short selling and present this as an evidence to contradict Miller (1977) hypothesis on underpricing.…”

Section: Literature Reviewmentioning

confidence: 98%

“…One direction of research investigates the impact of variation in short selling constraints on the stock prices assuming the existence of divergence of opinion among the investors by using measurable proxies for constraints. However, research is not unanimous on the proxies for short selling constraints and therefore provides conflicting evidence and interpretations (Chen et al 2002;Edwards and Hanley 2010;Figlewski 1981). For example, Figlewski (1981) and Edwards and Hanley (2010) provide conflicting explanation to whether the increase in short selling would be construed as a proxy for tightening or loosening of constraints.…”

mentioning

confidence: 99%

“…However, research is not unanimous on the proxies for short selling constraints and therefore provides conflicting evidence and interpretations (Chen et al 2002;Edwards and Hanley 2010;Figlewski 1981). For example, Figlewski (1981) and Edwards and Hanley (2010) provide conflicting explanation to whether the increase in short selling would be construed as a proxy for tightening or loosening of constraints. The other direction of research by Diether et al (2002) and Houge et al (2001) assumes the existence of short selling constraints in general and uses different proxies for the divergence of opinion to test Miller's hypothesis.…”

mentioning

confidence: 99%

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Short selling restrictions in 2005–2009 in Indian market and underpricing of initial public offerings

Gulati

Bose

Roy³

2015

J Econ Finan

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Most research explains underpricing of initial public offerings (IPOs) as the rational response of investors to the valuation uncertainty and the existence of informational friction in the IPO market. In contrast, Miller (1977) demonstrates that irrational sentiments of optimistic investors lead to high underpricing which pessimistic investors are unable to correct due to short selling constraints. Using first day flipping ratio and the trading ratio as proxies for divergence of opinion, we provide evidence consistent with Miller (1977) from Indian market that the greater divergence of opinion among investors results into higher underpricing. Previous research is not unanimous on proxies for short selling constraints and also do not control for the cross-sectional differences in the severity of constraints. We test Miller's hypothesis in a market that faced prohibitive regulatory restrictions on short selling. We also control for the period when constraints are marginally relaxed. Our findings provide more robust evidence. Our results suggest that short selling restrictions affect market efficiency adversely; there could still be other forces at play. Market regulators should take steps to facilitate short selling instead of restricting it.

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Section: Literature Reviewmentioning

confidence: 98%

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confidence: 99%

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confidence: 99%

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Short selling restrictions in 2005–2009 in Indian market and underpricing of initial public offerings

Gulati

Bose

Roy³

2015

J Econ Finan

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“…Exempt short sales are shorts that are exempt from the uptick rule. Generally, these short sales are thought of as market maker short sales (Edwards and Hanley 2009;Christophe et al 2010). Partitioning the data this way becomes important in our study because several of the exempt short sales may be from option market makers who are attempting to hedge the other side of bearish option trades (Danielsen and Sorescu 2001) and are therefore less informed than non-exempt short sales (Engelberg et al 2010).…”

Section: Data Descriptionmentioning

confidence: 99%

Are put-call ratios a substitute for short sales?

Blau

Brough

2014

Rev Deriv Res

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Prior research argues that pessimistic traders can use options as substitutes for short sales particularly when stocks are expensive to short. Motivated by this contention, we examine the relation between put-call ratios, short-selling activity, and constraints to short selling. Results show that (1) put-call ratios are inversely related, instead of directly related, to proxies for short-sale constraints and (2) the significant negative relation between current put-call ratios and future returns (Pan and Poteshman in Rev Financ Stud 19:871-908, 2006) is orthogonal to proxies for short-sale constraints. These results indicate that short-sale constraints do not influence bearish option activity. While prior studies show that short sellers are generally contrarian in contemporaneous and past returns, we find that put-call ratios follow periods of negative returns. However, any observed return predictability contained in put-call ratios is driven by ratios that follow periods of positive returns.

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“…They show that lead underwriters' clients are net buyers in the aftermarket and that quid pro quo arrangements allow bookrunners to substitute client purchases for direct aftermarket support. A recent paper by SEC staff, Edwards and Hanley (2010), indicates that a substantial number of "failures to deliver" are connected to short sales. The authors of this study indicate that these failures to deliver are connected to the short-selling activities of the underwriter.…”

Section: Introductionmentioning

confidence: 99%

How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing

Bartling

Park

2010

J. Financ. Quant. Anal.

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When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information.

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Short selling in initial public offerings☆

Cited by 94 publications

References 48 publications

Short selling restrictions in 2005–2009 in Indian market and underpricing of initial public offerings

Short selling restrictions in 2005–2009 in Indian market and underpricing of initial public offerings

Are put-call ratios a substitute for short sales?

How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing

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