Publication Type
Journal Article
Version
acceptedVersion
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)
Citation
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.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/4765
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1007/s11156-015-0539-8