How Does Underwriter Price Support Affect IPOs? Empirical Evidence

Abstract:     
While it is extensively documented that underwriters often "stabilize" or "support" initial public offerings (IPOs), less is known about how this practice impacts the IPO process. We argue that price support creates a short put position for underwriters, and thereby gives underwriters the incentive to reduce the ex-ante price risk of IPOs. We provide extensive empirical evidence that price support is related to IPO price risk, using several measures of support and risk. Rare data from SEC filings on price support, cross-sectional evidence from IPOs offered between 1985 and 1994, and data from two different price support regimes all indicate a negative relation between price support and the initial price risk of IPOs.

JEL Classifications: G18, G24

Working Paper Series