Decimalization, IPO aftermath, and liquidity

Charoenwong, Charlie, Ding, David K., and Thong, Tiong Yang (2016) Decimalization, IPO aftermath, and liquidity. Review of Quantitative Finance and Accounting, 47 (4). pp. 1303-1344.

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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.

Item ID: 46744
Item Type: Article (Research - C1)
ISSN: 1573-7179
Keywords: decimalization; IPO aftermath; underpricing; liquidity
Date Deposited: 04 Jan 2017 23:49
FoR Codes: 35 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 3502 Banking, finance and investment > 350299 Banking, finance and investment not elsewhere classified @ 100%
SEO Codes: 97 EXPANDING KNOWLEDGE > 970115 Expanding Knowledge in Commerce, Management, Tourism and Services @ 100%
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