Decimalization, IPO aftermath, and liquidity

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...

Full description

Saved in:
Bibliographic Details
Main Authors: CHAROENWONG, Charlie, DING, David K., THONG, Tiong Yang
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2016
Subjects:
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/4765
https://ink.library.smu.edu.sg/context/lkcsb_research/article/5764/viewcontent/DecimalizationIPOaftermatLiquidity_2016_afv.pdf
Tags: Add Tag
No Tags, Be the first to tag this record!
Institution: Singapore Management University
Language: English
Description
Summary: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.