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The Response to Share Mispricing by Issuing Firms and Short Sellers
Published online by Cambridge University Press: 07 March 2022
Abstract
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.
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- Research Article
- Information
- Creative Commons
- 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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