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

This study challenges existing literature in which underwriter "short covering transactions" and "stabilization" are deemed interchangeably. A unique approach is provided to identify the underwriter's true goal in conducting short covering trades in the aftermarket. We find that a significant number of underwriter short covering trades are not for stabilization purpose and when underwriters do employ them to stabilize weak offerings, most of these trades are conducted in clusters. To understand the underwriter's strategy, we compare the impact of clustered and non-clustered short covering transactions on trades and quotes. Our tests consistently reveal an asymmetry in the price impact associated with these two forms of short covering trades.