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Price stabilization, short selling, and IPO secondary market liquidity

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  • Boulton, Thomas J.
  • Braga-Alves, Marcus V.

Abstract

Prior research shows that failures to deliver, which commonly occur around initial public offerings (IPOs), typically result from underwriter price stabilization. Additionally, investors often establish short positions in IPO stocks that are unrelated to underwriter price stabilization. We study the relation between failures to deliver, short sales, and IPO trading costs. We find that failures to deliver are associated with greater liquidity, especially for IPOs likely to receive underwriter price support. However, contrary to prior research that finds that short selling is associated with greater liquidity, we find that short selling is negatively correlated with liquidity for IPO stocks with strong investor demand.

Suggested Citation

  • Boulton, Thomas J. & Braga-Alves, Marcus V., 2020. "Price stabilization, short selling, and IPO secondary market liquidity," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 278-291.
    • Handle: RePEc:eee:quaeco:v:76:y:2020:i:c:p:278-291
    DOI: 10.1016/j.qref.2019.09.013
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    More about this item

    Keywords

    Bid-ask spreads; Initial public offering (IPO); Failure to deliver; Short selling; Trading costs.;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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