Hostname: page-component-586b7cd67f-2plfb Total loading time: 0 Render date: 2024-11-26T04:12:44.487Z Has data issue: false hasContentIssue false
  • English
  • Français

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
*
[email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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.

References

Alti, A., and Sulaeman, J.. “When Do High Stock Returns Trigger Equity Issues?” Journal of Financial Economics, 103 (2012), 61–87.CrossRefGoogle Scholar
Asquith, P.; Pathak, P.; and Ritter, J.. “Short Interest, Institutional Ownership, and Stock Returns.” Journal of Financial Economics, 78 (2005), 243–276.CrossRefGoogle Scholar
Baker, M., and Stein, J.. “Market Liquidity as a Sentiment Indicator.” Journal of Financial Markets, 7 (2004), 271–299.CrossRefGoogle Scholar
Baker, M.; Stein, J.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 969–1005.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “The Equity Share in New Issues and Aggregate Stock Returns.” Journal of Finance, 55 (2000), 2219–2257.CrossRefGoogle Scholar
Barclay, M.; Fu, F.; and Smith, C.. “Rational Financial Management: Evidence from Seasoned Equity Offerings.” Working Paper, available at http://ssrn.com/astract=1099850 (2012).CrossRefGoogle Scholar
Bargeron, L., and Bonaime, A.. “Why Do Firms Disagree with Short Sellers? Managerial Myopia Versus Private Information.” Journal of Financial and Quantitative Analysis, 55 (2020), 2431–2435.CrossRefGoogle Scholar
Ben-Rephael, A.; Oded, J.; and Wohl, A.. “Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures.” Review of Finance, 18 (2014), 1299–1340.CrossRefGoogle Scholar
Boehmer, E.; Huszar, Z.; and Jordan, B.. “The Good News in Short Interest.” Journal of Financial Economics, 96 (2010), 80–97.CrossRefGoogle Scholar
Boehmer, E.; Huszar, Z.; Wang, Y.; and Zhang, X.. “Are Shorts Equally Informed? A Global Perspective.” Working Paper, Singapore Management University (2018).Google Scholar
Brav, A.; Graham, J.; Harvey, C.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483–527.CrossRefGoogle Scholar
Butler, A.; Cornaggia, J.; Grullon, G.; and Weston, J.. “Corporate Financing Decisions, Managerial Market Timing, and Real Investment.” Journal of Financial Economics, 101 (2011), 666–683.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Cho, C.; Han, S.; Kim, H.; and Kim, M.. “Excess Cash and Share Repurchase Effects.” Working Paper, York University (2017).Google Scholar
Cohen, L.; Diether, K.; and Malloy, C.. “Supply and Demand Shifts in the Shorting Market.” Journal of Finance, 62 (2007), 2061–2096.CrossRefGoogle Scholar
Cook, D.; Krigman, L.; and Leach, J. C.. “On the Timing and Execution of Open Market Repurchases.” Review of Financial Studies, 17 (2004), 463–498.CrossRefGoogle Scholar
Daniel, K., and Titman, S.. “Market Reactions to Tangible and Intangible Information.” Journal of Finance, 61 (2006), 1605–1628.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Stulz, R.. “Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle.” Journal of Financial Economics, 95 (2010), 275–295.CrossRefGoogle Scholar
Dittmar, A. “Why Do Firms Repurchase Stock?” Journal of Business, 73 (2000), 331–355.CrossRefGoogle Scholar
Dittmar, A., and Field, L.. “Do Corporate Managers Know When Their Shares are Undervalued? New Evidence Based on Actual (and not Just Announced) Stock Buybacks.” Journal of Applied Corporate Finance, 28 (2016), 73–85.Google Scholar
Dong, M.; Hirshleifer, D.; Richardson, S.; and Teoh, S.. “Does Investor Misevaluation Drive the Takeover Market?” Journal of Finance, 61 (2006), 725–762.CrossRefGoogle Scholar
Dong, M.; Hirshleifer, D.; and Teoh, S.. “Overvalued Equity and Financing Decisions.” Review of Financial Studies, 25 (2012), 3645–3683.CrossRefGoogle Scholar
Duffie, D.; Gârleanu, N.; and Pedersen, L.. “Securities Lending, Shorting, and Pricing.” Journal of Financial Economics, 66 (2002), 307–339.CrossRefGoogle Scholar
Engelberg, J.; Evans, R.; Leonard, G.; Reed, A.; and Ringgenberg, M.. “The Loan FEE Anomaly: A Short Sellers Best Ideas.” Working Paper, University of California (2020).CrossRefGoogle Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E., and French, K.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics, 60 (2001), 3–43.CrossRefGoogle Scholar
Frazzini, A., and Lamont, O.. “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns.” Journal of Financial Economics, 88 (2008) 299–322.CrossRefGoogle Scholar
Green, J.; Hand, J.; and Zhang, X.. “The Characteristics That Provide Independent Information About Average U.S. Monthly Stock Returns.” Review of Financial Studies, 30 (2017), 4389–4436.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “The Information Content of Share Repurchase Programs.” Journal of Finance, 59 (2004), 651–680.CrossRefGoogle Scholar
Hertzel, M., and Li, Z.. “Behavioral and Rational Explanations of Stock Price Performance Around SEOs: Evidence from a Decomposition of Market-to-Book Values.” Journal of Financial and Quantitative Analysis, 45 (2010), 935–958.CrossRefGoogle Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Digesting Anomalies: An Investment Approach.” Review of Financial Studies, 28 (2015), 650–705.CrossRefGoogle Scholar
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 1–24.CrossRefGoogle Scholar
Kaplan, S., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics, 107 (1997), 169–215.CrossRefGoogle Scholar
Kim, W., and Weisbach, M.. “Motivations for Public Equity Offers: An International Perspective.” Journal of Financial Economics, 87 (2008), 281–307.CrossRefGoogle Scholar
Lee, I. “Do Firms Knowingly Sell Overvalued Equity?” Journal of Finance, 52 (1997), 1439–1466.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 52 (1997), 1823–1850.CrossRefGoogle Scholar
Lyandres, E.; Sun, L.; and Zhang, L.. “The New Issues Puzzle: Testing the Investment-Based Explanation.” Review of Financial Studies, 21 (2008), 2825–2855.CrossRefGoogle Scholar
Miller, E. “Risk, Uncertainty, and Divergence of Opinion.” Journal of Finance, 32 (1977), 1151–1168.CrossRefGoogle Scholar
Muravyev, D.; Pearson, N.; and Pollet, J.. “Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options.” Working Paper, University of Illinois (2019).Google Scholar
Peyer, U., and Vermaelen, T.. “The Nature and Persistence of Buyback Anomalies.” Review of Financial Studies, 22 (2009), 1693–1745.CrossRefGoogle Scholar
Ritter, J. “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 3–27.CrossRefGoogle Scholar
Schultz, P. “Pseudo Market Timing and the Long-Run Underperformance of IPOs.” Journal of Finance, 58 (2003), 483–517.CrossRefGoogle Scholar
Schultz, P. “What Makes Short Selling Risky: Other Short Sellers.” Working Paper, University of Notre Dame (2020).CrossRefGoogle Scholar
Spiess, D., and Affleck-Graves, J.. “Underperformance in Long-Run Stock Returns Following Seasoned Equity Offerings.” Journal of Financial Economics, 38 (1995), 243–267.CrossRefGoogle Scholar
Stein, J. “Rational Capital Budgeting in an Irrational World.” Journal of Business, 69 (1996), 429–455.CrossRefGoogle Scholar
Zheng, L. “Anticipating the Value of Share Repurchase Announcements: The Role of Short Sellers.” International Journal of Finance & Economics, 26 (2021), 1–12.CrossRefGoogle Scholar