Decimalization, IPO Aftermath and Liquidity
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.
Decimalization, IPO, Underpricing, Liquidity, Aftermath
Finance and Financial Management | Portfolio and Security Analysis
Financial Management Association European Conference, Siena, Italy, June 2005
City or Country
Charoenwong, C.; DING, David K.; and Thong, Tiong Yang.
Decimalization, IPO Aftermath and Liquidity. (2005). Financial Management Association European Conference, Siena, Italy, June 2005. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/726