Publication Type

Journal Article

Version

Postprint

Publication Date

11-2016

Abstract

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.

Keywords

Decimalization, IPO aftermath, Underpricing, Liquidity

Discipline

Corporate Finance | Finance and Financial Management

Research Areas

Finance

Publication

Review of Quantitative Finance and Accounting

Volume

47

Issue

4

First Page

1303

Last Page

1344

ISSN

0924-865X

Identifier

10.1007/s11156-015-0539-8

Publisher

Springer Verlag (Germany)

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1007/s11156-015-0539-8

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