An Analysis of the Liquidity Benefits Provided by Secondary Markets

Posted: 19 Mar 2009

See all articles by Tomas Mantecon

Tomas Mantecon

University of North Texas

Percy Poon

University of Nevada, Las Vegas - Department of Finance

Date Written: November 18, 2008

Abstract

Listing shares in liquid secondary markets either to facilitate acquisitions or to diversify owner's personal wealth are among the most important reasons for firms to go public [Brau, J.C., Fawcett, S.E., 2006. Initial public offerings: An analysis of theory and practice. Journal of Finance 61, 399-436]. We contend that the expected benefits derived from the liquidity provided by secondary markets are relevant for understanding important decisions made in preparation for an IPO. We hypothesize that the potential losses caused by an IPO failure induce firms that benefit more from going public to hire more reputable underwriters and to adopt more conservative pricing policies. We use several proxies for the benefits firms derive from post-IPO liquidity. The results indicate that firms that benefited more from liquidity were taken public by more prestigious underwriters and exhibited substantially larger levels of price revisions and underpricing. Post-IPO liquidity is also important for understanding the decision to retain the lead underwriter in subsequent SEOs.

Suggested Citation

Mantecon, Tomas and Poon, Percy, An Analysis of the Liquidity Benefits Provided by Secondary Markets (November 18, 2008). Journal of Banking and Finance, Vol. 33, 2009, Available at SSRN: https://ssrn.com/abstract=1364376

Tomas Mantecon (Contact Author)

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Percy Poon

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

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