Decimalization, IPO Aftermath and Liquidity

Publication Type

Conference Paper

Publication Date

6-2005

Abstract

This paper investigates the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that after decimalization, the relation between spreads and underpricing becomes negative, which suggests that the benefits from the increased price competition accrue more to hot IPOs. The depths are generally smaller post-decimalization because of the higher probability of front-running that aggravates the costs of adverse selection and limit order submission. In addition, we show that underwriters still provide price support but are only willing to cover the initial short position if it is still profitable post-decimalization. We also find that decimal pricing does not change the flipping strategy of institutions for cold IPOs as flipping is likely bounded by underwriter price support and shares allocation. Institutions, however, tend to flip more hot IPOs in the post- rather than pre-decimalization period, suggesting that the cost of flipping is much lower for those share prices with a substantial run-up during aftermarket trading.

Keywords

Decimalization, IPO, Underpricing, Liquidity, Aftermath

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Financial Management Association European Conference, Siena, Italy, June 2005

City or Country

Siena, Italy

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