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The Response to Share Mispricing by Issuing Firms and Short Sellers

Published online by Cambridge University Press:  07 March 2022

Paul Schultz Open the ORCID record for Paul Schultz [Opens in a new window]
Paul Schultz*
Affiliation:
University of Notre Dame Mendoza College of Business
*
pschultz@nd.edu
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Abstract

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Short sale constrained stocks are overpriced on average. I show that firms exploit mispricing by selling shares when their stock is short sale constrained and repurchasing shares when their stock is easily shorted. Stocks underperform following seasoned equity offerings (SEOs) if and only if the stock is difficult to short. This suggests that some SEOs are motivated by mispricing, whereas others are not. Short selling costs make it difficult for investors to profit from the poor performance following SEOs. Short selling and SEOs are alternative ways to supply shares to investors, and firms become the low-cost share provider when short selling is costly.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 3 , May 2023 , pp. 1078 - 1110
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank an anonymous referee, Jarrad Harford (the editor), Sophie Shive, Ajai Singh, Qinghai Wang, and seminar participants at the University of Central Florida and the University of Notre Dame for helpful comments on this article.

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