Downward-sloping Demand Curves or Price Pressure Effects? New Evidence from Japanese Seasoned Equity Issues

Abstract

Focusing on the behavior of stock prices around seasoned equity offerings, we examine three competing explanations: downward-sloping demand curves, temporary price pressure and information effects. Using the short covered ratio as a proxy for the type of short seller, we examine stock prices around the offer price determination day. We find the amount of shares offered as a proportion of the number of shares outstanding is negatively related to abnormal returns on both the announcement and the issue day. These results are consistent with the downward-sloping demand curve hypothesis. We find evidence of manipulative short selling as well. Manipulative short selling is concentrated before and on the price determination day. We observe price recovery after the price determination day that is consistent with the price pressure hypothesis.