Underwriter Short Covering in the IPO Aftermarket: A Clinical Study

Abstract:     
In this paper, we present a case study of underwriter trading in the aftermarket of a recent initial public offering (IPO). The lead underwriter for this issue actively repurchased approximately 15 percent of the issue size to cover its initial short position. Detailed audit-trail and short-covering data identify the timing, volume, and counterparties for the Lead's trades. We find that price-support objectives are important on the first two short-covering days. Subsequently, repurchases appear to be governed primarily by their profitability and market liquidity. The Lead incurs lower transaction costs than other large traders, but provides substantial liquidity to the market.

Number of Pages in PDF File: 29

Keywords: Initial public offering, price stabilization, short covering, aftermarket liquidity

JEL Classification: G24, G12, G32

working papers series