We investigate the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that the relation between bid–ask spread and underpricing becomes negative post-decimalization, suggesting that benefits from the increased price competition accrue more to hot IPOs. The quoted depth is generally smaller post-decimalization due to a higher probability of front running, which aggravates the cost of adverse selection and limit order submission. We show that underwriters continue to provide price support but are only willing to cover the initial short position, if profitable to do so. Decimal pricing does not affect the flipping strategy of institutions for cold IPOs as they are likely bound by the underwriter’s price support and their share allocation. Institutions, however, tend to flip more hot IPOs during the post- than in the pre-decimalization period, suggesting that the cost of flipping is lower for shares with a substantial price run-up during aftermarket trading.
Decimalization, IPO aftermath, Underpricing, Liquidity
Corporate Finance | Finance and Financial Management
Review of Quantitative Finance and Accounting
Springer Verlag (Germany)
CHAROENWONG, Charlie; DING, David K.; and THONG, Tiong Yang.
Decimalization, IPO aftermath, and liquidity. (2016). Review of Quantitative Finance and Accounting. 47, (4), 1303-1344. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/4765
Copyright Owner and License
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.