Underpricing, Ownership Dispersion, and Aftermarket Liquidity of IPO Stocks

Posted: 11 Oct 2007 Last revised: 18 Feb 2019

See all articles by Steven Xiaofan Zheng

Steven Xiaofan Zheng

University of Manitoba - Asper School of Business

Mingsheng Li

Bowling Green State University - College of Business Administration

Abstract

Booth and Chua (1996) hypothesize that IPOs are underpriced to promote ownership dispersion, which in turn increases aftermarket liquidity of IPO stocks. We examine a sample of 1,179 Nasdaq IPOs and find that underpricing is positively correlated with the number of non-block institutional shareholders after IPO but negatively correlated with the changes in the total number of shareholders. Firms with many non-block institutional shareholders tend to have high liquidity in the secondary market. These results provide support to Booth and Chua's hypothesis. Underpricing also has direct effects on secondary market liquidity after controlling for ownership structure and other factors.

Keywords: Initial public offering, IPO, underpricing, liquidity, ownership

JEL Classification: G12, G14

Suggested Citation

Zheng, Steven Xiaofan and Li, Mingsheng, Underpricing, Ownership Dispersion, and Aftermarket Liquidity of IPO Stocks. Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1020762

Steven Xiaofan Zheng (Contact Author)

University of Manitoba - Asper School of Business ( email )

Department of Accounting and Finance
Winnipeg, Manitoba R3T 5V4
Canada
204-474-7933 (Phone)

Mingsheng Li

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

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