Short Selling In Initial Public Offerings

A number of academic papers have used short sale constraints in the immediate aftermarket of IPOs to explain short-term pricing anomalies that are subsequently reversed in the long-term. Using newly available data, this paper documents that short selling is prevalent early in the aftermarket trading of IPOs. Greater short selling is observed in IPOs with positive partial adjustment, large trading volume and high initial returns. Although the authors' results support t he conjecture that large levels of underpricing may be indicative of overvaluation, they find that short selling does not appear to limit observed underpricing.