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Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket

Author

Listed:
  • Panos N. Patatoukas

    (Haas School of Business, University of California, Berkeley, California 94720)

  • Richard G. Sloan

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

  • Annika Yu Wang

    (Bauer College of Business, University of Houston, Houston, Texas 77204)

Abstract

We use the initial public offering (IPO) setting to provide evidence that the combination of valuation uncertainty and short-sales constraints generates significant equity market mispricing. The IPOs that we predict to be most susceptible to overpricing in the immediate aftermarket have first-day returns of +47% and lockup expiration returns of − 9%. Our detailed analysis of securities lending market data confirms that these IPOs experience severe short-sales constraints that peak around the lockup expiration. Our paper both explains the anomalous pricing of IPOs and highlights the importance of valuation uncertainty and short-sales constraints in explaining equity mispricing.

Suggested Citation

  • Panos N. Patatoukas & Richard G. Sloan & Annika Yu Wang, 2022. "Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket," Management Science, INFORMS, vol. 68(1), pages 608-634, January.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:1:p:608-634
    DOI: 10.1287/mnsc.2020.3900
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