Short sale constraints prior to seasoned equity offers, imposed by Rule 10b-21 in 1988, are believed to compromise pricing efficiency and contribute to the large temporal increase in offer price discounting. This study provides additional insights by examining shelf-registered offers, which were exempt from pre-issue short sale constraints until 2004. The results suggest that pre-issue short sale constraints do not influence the level of discounting in seasoned equity offers. Moreover, this study reports that the recent temporal increase in discounting is due to a greater prevalence of overnight shelf offers, which are associated with relatively large offer price discounts.

This study examines the cross-sectional impact of the 2008 short sale ban on the returns of US financial stocks. Motivated by the large cross-sectional variation in the extent to which banned stocks suffer an illiquidity shock, we hypothesize that stocks with larger liquidity declines are associated with poorer contemporaneous stock returns. The evidence supports this hypothesis and suggests that this effect is stronger for more liquid stocks, as predicted by Amihud and Mendelson (1986). Moreover, consistent with Miller’s (1977) model, we report a valuation reversal whereby stocks with higher abnormal returns at the onset of the ban have lower abnormal returns at its removal. Our findings are robust when we control for firms most affected by TARP, include non-banned matched firms, and compare banned firms’ stock returns with their bond returns. From a policy standpoint, the ban reduced valuations, ceteris paribus, of the stocks that were hardest hit by illiquidity.