Short sales constraint and SEO pricing |
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| Institution: | 1. Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore;2. School of Economics and Finance, College of Business, Massey University, Auckland, New Zealand;3. Lee Kong Chian School of Business, Singapore Management University, Singapore 178899, Singapore;1. Indian Institute of Management, Ahmedabad, Public Systems Group, Dorm 29, Room 30, New Campus, IIM Ahmedabad, Vastrapur, 380015, Ahmedabad, Gujarat, India;2. Indian Institute of Management, Ahmedabad, Public Systems Group, Wing 16B, Main Campus, IIM Ahmedabad, Vastrapur, 380015, Ahmedabad, Gujarat, India;1. Finance and Control Group, Indian Institute of Management Calcutta, India;2. Department of Finance, Copenhagen Business School, Denmark;1. Graduate Program in Electrical Engineering, Universidade Federal de Minas Gerais, Av. Antônio Carlos, 6627, Belo Horizonte, Minas Gerais 31270-901, Brazil;2. WorldSense, Av. Afonso Pena, 4000, Belo Horizonte, Minas Gerais 30130-008, Brazil |
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| Abstract: | We examine the influence of SEC's Rule 105 on informed trading and the information content of stock prices around an SEO's offer day. We show that constraints on short sales inhibit informed trading and hamper incorporation of information into stock prices for offers whose traders have private adverse information and without options listing. The constraints contribute to increased price uncertainty and higher market sensitivity to seller-initiated trading. After controlling for other causes of SEO discounts, we find that the decrease in information content of stock prices just before an offer day has a significant impact on the SEO's value discount. |
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