Short-selling restriction and the underpricing of seasoned equity offerings

Abstract

On August 25. 1988. the SEC adopted Rule I0b-21. which attempted to curb manipulative short-selling activities preceding the equity issue date. We find significant SEO discounts (underpricing) during the I990s. but not during the 1980s. While we find evidence that suggests short-selling does occur throughout our entire sample period. we cannot find evidence confirming that short-sales are manipulative. Therefore. the restriction on short-selling. which makes pre-offer day prices less informative. appears to have made issue discounts larger. We test alternative hypotheses. but our conclusion remains intact.