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...

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Main Authors: CHAROENWONG, Charlie, DING, David K., THONG, Tiong Yang
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Language:English
Published: Institutional Knowledge at Singapore Management University 2016
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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
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spelling sg-smu-ink.lkcsb_research-57642017-03-31T03:46:42Z Decimalization, IPO aftermath, and liquidity CHAROENWONG, Charlie DING, David K. THONG, Tiong Yang 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. 2016-11-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/4765 info:doi/10.1007/s11156-015-0539-8 https://ink.library.smu.edu.sg/context/lkcsb_research/article/5764/viewcontent/DecimalizationIPOaftermatLiquidity_2016_afv.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Decimalization IPO aftermath Underpricing Liquidity Corporate Finance Finance and Financial Management
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Decimalization
IPO aftermath
Underpricing
Liquidity
Corporate Finance
Finance and Financial Management
spellingShingle Decimalization
IPO aftermath
Underpricing
Liquidity
Corporate Finance
Finance and Financial Management
CHAROENWONG, Charlie
DING, David K.
THONG, Tiong Yang
Decimalization, IPO aftermath, and liquidity
description 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.
format text
author CHAROENWONG, Charlie
DING, David K.
THONG, Tiong Yang
author_facet CHAROENWONG, Charlie
DING, David K.
THONG, Tiong Yang
author_sort CHAROENWONG, Charlie
title Decimalization, IPO aftermath, and liquidity
title_short Decimalization, IPO aftermath, and liquidity
title_full Decimalization, IPO aftermath, and liquidity
title_fullStr Decimalization, IPO aftermath, and liquidity
title_full_unstemmed Decimalization, IPO aftermath, and liquidity
title_sort decimalization, ipo aftermath, and liquidity
publisher Institutional Knowledge at Singapore Management University
publishDate 2016
url 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
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