Theory and Hypotheses
3.The relation between short selling and the issue discount:
•Higher levels of informed short selling before SEO issue dates should be associated with smaller issue discounts àincreased price efficiency.
•Higher levels of manipulative short selling before SEO issue dates should be associated with larger issue discounts àdecreased price efficiency.
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Issue discount: % difference between the SEO offering price and the closing price on the day before the offering.

To test this hypothesis the authors run regressions of SEO issue discounts on various firm and offering characteristics and include measures of short selling intensity prior to the issue date—the explanatory variables are designed to capture various characteristics of the firm or offering that are known to capture discount rate. These regression are similar to Corwin’s 2003 work.