This paper examines whether issue discounts and stock return around seasoned equity offerings (SEOs) differ according to the type of short selling, manipulative or informative, in Japan where a special short selling regulation around SEOs, such as Rule 105 in the United States, does not exist. Following Gerard and Nanda (1993), this paper measures the type of short selling based on the ratio of covering short sales with new shares (SCR). This paper finds that a higher level of short selling with a high SCR has a negative effect on the informativeness of secondary market prices, but a higher level of short selling with a low SCR has a positive effect on the information content. We also find evidence that short selling with a high SCR is associated with a price recovery, but short selling with a low SCR is associated with a price drop. Although the level of short selling has a negative effect on issue discounts, the level of short selling with a high SCR has a positive effect on underpricing. These results indicate that manipulative short selling increases by covering shorts with new shares.
JEL classification: G24; G38; G39
Keywords: Seasoned equity offerings; Short sales; Discounts; Price pressure; Manipulative short sales; Informative short sales