Stabilization Activity in Italian IPOs

Abstract

Commission Regulation (EC) No 2273/2003 regulates the price stabilization activities for equity initial public offerings (IPOs) in Europe as a form of permitted market manipulation. To test the actual practices and effects of stabilization we empirically analyze the support provided by the underwriters of 141 Italian IPOs from 2000 through to 2008. We find that the underwriters support the share prices not only by short covering, but also by posting pure stabilization bids. Pure short covering is mostly used by more reputable underwriters for IPOs with higher institutional participation and more secondary shares in the offer, whereas the opposite is true for pure stabilization IPOs. We try to identify some patterns in underwriters’ aftermarket activities and analyze the extent to which the stabilization activity, permitted for four weeks after trading begins, produces temporary or permanent effects on share prices.

Keywords: Law and finance, IPOs, underpricing, stabilisation, greenshoe option, overallotment facility, short covering, pure stabilization

JEL Classification: G24, G32, G38, K12, K22