Changing the rules again: Short selling in connection with public equity offers

Don M. Autore and Dominique Gehy

Journal of Banking & Finance, 2013, vol. 37, issue 6, 1974-1985

Abstract: We study the impact of two recent regulations that impose restrictions on short selling. First, since October 2007 any investor that short sells a firm’s stock is prohibited from purchasing shares in the firm’s seasoned equity offering (SEO) if the short occurred in the five days prior to the offering (pursuant to an amendment to Rule 105). Previously Rule 105 only disallowed investors from covering a pre-issue short sale with shares purchased in the offering. We hypothesize that the amended rule has the unintended consequence of greater discounting for overnight offers, which are not announced in advance, because the rule excludes some potential buyers and thereby forces underwriters to set lower offer prices to fully distribute the offer. The evidence supports this hypothesis. Second, we examine the impact of the SEC’s 2008 Emergency Order that greatly curtails naked short selling on all stocks under its jurisdiction. We find that the Emergency Order is associated with large increases in discounting for offers announced in advance, suggesting that the removal of naked short sellers is associated with reduced pre-SEO pricing efficiency. Taken together, the results imply that recent restrictions on short selling have significant unintended effects on the capital raising process.

Keywords: Short sale; Seasoned equity offer; Rule 105; Naked short sale (search for similar items in EconPapers)
JEL-codes: G14 G32 G38 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:6:p:1974-1985

DOI: 10.1016/j.jbankfin.2013.01.014

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