Essays on underwriter short covering transactions in initial and seasoned public offerings of equity

Date of Award




Degree Name

Doctor of Philosophy (Ph.D.)



First Committee Member

Raymond P. H. Fishe - Committee Chair


Underwriters commonly oversell new offerings in the primary market and cover their short positions by purchasing from the aftermarket when prices fall below the offer price. This study analyzes underwriter short covering transactions in 198 seasoned and unseasoned issues that went public during the period of May 1997 to July 1998 and involve underwriter short covering trades. It consists of three main parts: (1) a review of the process of going public and literature on IPO pricing; (2) an essay examining the price impact associated with underwriter short covering trades; and (3) an essay analyzing the underwriter's trading strategy in conducting short covering trades.We find that the market responds rapidly to short covering trades. Both trade and quoted prices achieve new equilibriums within one transaction after short covering trades occur. Clustered short covering trades appear to be effective in stabilizing the market. The underwriter's aggressive clustered bids prop up the stock price and passive clustered bids eliminate the negative impact from investors' sell transactions. Non-clustered short covering trades, however, do not have such an impact.Short covering is a well-planned event and integrated with the underwriter's pricing decision. Although short covering trades are the vehicles of implementing price support for weak offerings, they are NOT limited to stabilization purpose. Only 83 of the 198 issues that involve underwriter short covering trades are actually "supported" by the underwriter. Short covering is a cost center when the underwriter stabilizes weak issues but a profit center in the case of hot issues. Consistent with other studies, we find that underwriter short covering transactions are concentrated on the first five days of trading and subside substantially afterwards. Clustered bids are mainly used to stabilize weak issues but non-clustered bids dominate when the underwriter tries to get out of his naked short position in hot issues.


Economics, Finance

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