IPO underpricing and after-market liquidity

Andrew Ellul and Marco Pagano

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: The underpricing of the shares sold through Initial Public Offerings (IPOs) is generally explained with asymmetric information and risk. We complement these traditional explanations with a new theory. Investors who buy IPO shares are also concerned by expected liquidity and by the uncertainty about its level when shares start trading on the after-market. The less liquid shares are expected to be, and the less predictable their liquidity is, the larger will be the amount of "money left on the table" by the issuer. We present a model that integrates such liquidity concerns within a traditional framework with adverse selection and risk. The model's predictions are supported by evidence from a sample of 337 British IPOs effected between 1998 and 2000. Using various measures of liquidity, we find that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing, after controlling for variables traditionally used to explain underpricing.

Keywords: liquidity; initial public offering; post-IPO market; after-market trading (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2003-06-01, Revised 2006-02-09
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (119)

Published in Review of Financial Studies, 2006, vol. 19, pages 381-421

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Related works:
Journal Article: IPO Underpricing and After-Market Liquidity (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:99

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