Decimalization, IPO aftermath, and liquidity

Charlie Charoenwong (), David Ding and Tiong Yang Thong ()
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Charlie Charoenwong: Nanyang Technological University
Tiong Yang Thong: James Cook University Australia

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 4, No 16, 1303-1344

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: G10 G12 G18 G19 G24 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-015-0539-8

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