Short-Sales Constraints and Aftermarket IPO Pricing: Evidence on Short Sellers as De Facto Gatekeepers
Thursday, 23 Nov 2017 | 10:30am - 12:00noon
1303, K.K. Leung Bldg
Dr. Panos N. Patatoukas
Associate Professor in Accounting
Haas School of Business
University of California at Berkeley
Regulators and scholars have recognized failures on the part of professional gatekeepers to protect investors from buying overpriced securities and the role of short sellers as de facto gatekeepers. We provide new evidence on the role of short sellers as de facto gatekeepers in the IPO aftermarket. IPOs provide a unique setting to analyze the effectiveness of short sellers as capital market gatekeepers, because divergence of investor opinion about fundamental value is high and floating stock is low. We find that sell-side analysts fail to fulfill their gatekeeping role since they promote IPOs that are ex ante more likely to become overpriced. Short sellers actively target these stocks, attempting to arbitrage the overpricing. However, short-sellers’ ability to shield investors from overpricing is limited due to binding short-sales constraints. The resulting equilibrium overpricing subsides as IPO lockup agreements expire and short-sales constraints are relaxed.