Stabilization, Syndication, and Pricing of IPOs
University of California, Los Angeles (UCLA) - Finance Area
Vikram K. Nanda
Georgia Institute of Technology - College of Management
J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1996
We argue that in the after-market trading of an IPO, the underwriting syndicate, by standing ready to buy back shares at the offer price ("price stabilization"), compensates uninformed investors ex post for the adverse selection cost they face in bidding for IPOs. This dominates ex ante compensation by underpricing. The reason is thatstabilization exploits ex post information about investor demand whereas underpricing must be based on ex ante information. However, liquidity and syndication costs constrain the use of stabilization which, in equilibrium, generates some underpricing as well. We develop a model that formalizes this intuition and generates several empirical implications.
JEL Classification: G30Accepted Paper Series
Date posted: May 20, 1996
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